Tax Tips & Calculators

Student Loan Interest

You may be able to deduct up to $2,500 of interest payments on a qualified student loan if your modified adjusted gross income (MAGI) is less than $70,000 ($140,000 if Married Filing Jointly). You can't deduct student loan interest if someone else claims you as a dependent or if you're Married Filing Separately. For the Student Loan Interest Deduction, you are a dependent even if you aren't claimed as a dependent because you file a joint return, the person who would be eligible to claim you is a dependent of another taxpayer, or if you would be a qualifying relative and your gross income is $3,400 or more.

A qualified student loan is one that is taken out only to pay for qualified education expenses at an eligible educational institution. An eligible educational institution (college, university, vocational school or other post-secondary institution) is one that is eligible to participate in a student aid program administered by the Department of Education. Contact the institution for information as to whether it qualifies.

Qualified education expenses include tuition and fees, certain room and board expenses, books, supplies, equipment, and other necessary expenses. Qualified education expenses must be reduced by the amount paid for them with tax-free educational benefits, such as the exclusion for Savings Bond interest for taxpayers with qualified higher education expenses, tax-free scholarships, tax-free employer-provided education benefits, and tax-free distributions from a Coverdell ESA or qualified tuition plan.

The loan can't be from a related person or made under a qualified employer plan. You can deduct the interest only if you are legally required to make payments on the loan.

The student must be enrolled at least half-time in a program leading to a degree or other recognized educational credential.

You can't claim the deduction for student loan interest if a deduction for the interest would be allowed under another rule (for example, under the rules for home mortgage interest).

The Student Loan Interest Deduction is taken as an adjustment to income, so you can claim this deduction even if you don't itemize deductions on Schedule A (Form 1040).

Work-related Education and Employer-provided Educational Assistance

You may be able to deduct the cost of qualifying work-related education as a business expense if you weren't reimbursed by your employer or if the cost exceeded your reimbursement. You can claim the deduction only if you itemize deductions. The deduction is one of the deductions subject to the 2% of adjusted gross income floor. The education must also meet one of these criteria:

• The education is required by law or by your employer to keep your present salary, status or job.
• The education maintains or improves skills needed in your present work.

If the education is needed solely to meet the minimum educational requirements of your present job, or will qualify you for a new trade or career, you can't deduct the educational expenses. Tuition and fees you can't deduct because they don't meet the requirements may be deductible as part of the tuition and fees deduction discussed below. It's generally better to claim the tuition and fees deduction.

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. Payments in excess of $5,250 are taxable unless the payment qualifies as a working condition fringe benefit. The payment will qualify under this provision if you could deduct the education if you paid for it. Benefits include payments for tuition, fees, books, supplies and equipment. The payments may be for either undergraduate- or graduate-level courses. To qualify, the plan must be written. Your employer will include the taxable amount (if any) in your W-2 wages.

Tuition and Fees Deduction

If your MAGI is less than $65,000 ($130,000 if Married Filing Jointly), you can deduct up to $4,000 of eligible tuition and fees. If your MAGI is between $65,000 and $130,000 ($130,000 and $160,000 if Married Filing Jointly), you can deduct up to $2,000 of eligible tuition and fees. If your MAGI is more than $80,000 ($160,000 or more if Married Filing Jointly) you can't claim the tuition and fees deduction.

You can't claim the deduction if you're Married Filing Separately, if another person can claim you as a dependent, or if you were a nonresident alien for any part of the year (unless you elect to be treated as a resident alien).

You can claim the tuition and fees deduction or an education credit, but not both. Choose the benefit that results in the larger tax savings. You can't use expenses used to figure this deduction when figuring the exclusion for savings bonds interest (discussed above) or the exclusion for distribution from a Coverdell ESA or QTP. You also must reduce the expenses used to figure this deduction by the amount of tax-free scholarships and nontaxable employer-provided educational assistance you received.

Recordkeeping

You need to keep records of any deduction claimed on your tax return. Examples of what you should keep:

• documentation of enrollment dates (e.g. transcripts, course descriptions, catalogs)
• documentation of subjects studied along with descriptions of educational activity
• receipts for tuition and books
• receipts for meals and lodging while traveling for educational purposes
• receipts for travel and transportation
• complete information about scholarship or fellowship grants, including amounts you received during the year

For more information on deducting college expenses, check with a tax professional.