Publication 970 |
2000 Tax Year |
Student Loan Interest Deduction
If you paid interest on a student loan in 2000, you may be able to
deduct up to $2,000 of the interest you paid. You can deduct interest
paid during the first 60 months that interest payments are
required on the loan.
What is the tax benefit of the student loan interest
deduction?
The benefit of the student loan interest deduction is that you may
be able to reduce the amount of your income that is subject to tax by
up to $2,000 in the year 2000 (up to $2,500 for 2001 and later years).
This deduction is taken as an adjustment to income. This means you
can claim this deduction even if you do not itemize deductions on
Schedule A (Form 1040).
Include as interest.
Loan origination fees (other than fees for services) and
capitalized interest are student loan interest if all other
requirements are met.
Loan origination fees.
These are the costs of getting the loan.
Capitalized interest.
This is unpaid interest on a student loan that is added by the
lender to the outstanding principal balance of the loan.
If you pay more than $600 in interest during the year to a single
lender, you should receive a statement at the end of the year from the
lender showing the amount of interest you paid. That information will
help you complete your tax forms.
Who Can Claim the Deduction?
Generally, you can claim the deduction if all of the
following requirements are met.
- If you are married, you are filing a joint return.
- No one else is claiming an exemption for you on
their tax return.
- You paid interest on a loan taken out only to pay tuition
and other qualified higher education expenses for yourself,
your spouse, or someone who was your dependent when the loan was taken
out.
- The education expenses were paid or incurred within a
reasonable period of time before or after the loan was
taken out.
- The person for whom the expenses were paid or incurred was
an eligible student.
- The first 60 months in which interest payments
were required on the loan did not end before January 2000.
Many of the terms used in the above list are explained later in
this chapter. Who Can Claim the Deduction
Married.
If you were married on the last day of the year, you are considered
married for the entire year. You are not considered married if you are
eligible to use the unmarried head of household filing status. More
information about your correct filing status can be found in
Publication 501,
Exemptions, Standard Deduction, and Filing
Information.
Claiming an exemption.
Another taxpayer is claiming an exemption for you on their tax
return if they list your name on line 6c, Form 1040 (or Form 1040A).
Dependent.
Generally, a dependent is someone who:
- Receives most of his or her support from you,
- Is either related to you or lives with you, and
- Is a citizen or resident of the United States, Canada, or
Mexico.
More information about dependents can be found in Publication 501.
What are Qualified Higher Education Expenses?
Generally, these expenses are the total costs of attending an
eligible educational institution, including graduate
school. They include the costs of:
- Tuition and fees.
- Room and board.
- Books, supplies, and equipment.
- Other necessary expenses (such as transportation).
However, you must reduce these costs by the total amount
paid for them with the following tax-free items.
- Employer-provided educational assistance benefits. See
chapter 7.
- Tax-free withdrawals from an education IRA. However, the
tax-free treatment of the withdrawal can be waived. See chapter 4.
- U.S. savings bond interest used to pay qualified higher
education expenses. See chapter 6.
- Certain scholarships. See Publication 520,
Scholarships
and Fellowships.
- Veterans' educational assistance benefits.
- Any other nontaxable payments (other than gifts, bequests,
or inheritances) received for educational expenses.
Eligible educational institution.
An eligible educational institution is any college, university,
vocational school, or other postsecondary educational institution
eligible to participate in a student aid program administered by the
Department of Education. It includes virtually all accredited, public,
nonprofit, and proprietary (privately owned profit-making)
postsecondary institutions.
For purposes of the student loan interest deduction, the term also
includes an institution conducting an internship or residency program
leading to a degree or certificate from an institution of higher
education, a hospital, or a health care facility that offers
postgraduate training.
The educational institution should be able to tell you if it is an
eligible educational institution.
No double benefit allowed.
You cannot deduct as interest on a student loan any amount you can
deduct under any other provision of the tax law (for example, home
mortgage interest).
What Is A Reasonable Period of Time?
Qualified higher education expenses paid with the proceeds of
education loans that are part of a federal post-secondary education
loan program meet the requirement of being paid or incurred within a
reasonable period of time before or after the loan is taken out.
For other loans, the reasonable period of time usually is
determined based on all the relevant facts and circumstances. However,
see Reasonable period safe harbor, next.
Reasonable period safe harbor.
Qualified education expenses are treated as paid or incurred within
a reasonable period of time before or after the debt is incurred if:
- The expenses relate to a particular academic
period, and
- The loan proceeds are disbursed within a period that begins
60 days before the start of that academic period and ends 60 days
after the end of that academic period.
Academic period.
An academic period includes a semester, trimester, quarter, or
other period of study (such as a summer school session) as reasonably
determined by an educational institution.
Who Is An Eligible Student?
An eligible student is a student who was enrolled at least
half-time in a program that leads to a degree, certificate, or other
recognized educational credential.
Enrolled at least half-time.
A student was enrolled at least half-time if the student was taking
at least half the normal full-time work load for his or her course of
study.
The standard for what is half of the normal full-time work load is
determined by each eligible educational institution. However, the
standard may not be lower than standards for half-time established by
the Department of Education under the Higher Education Act of 1965.
Student Loan Interest Deduction at a Glance
First 60 Months
Regardless of when you took out the loan, you can only deduct the
interest paid during the first 60 months that interest payments are
required.
No deduction is allowed for interest payments due or paid before
1998.
Beginning of 60-month period.
The date the 60-month interest deduction period begins is based on:
- The terms of the loan agreement, or
- Applicable federal regulations, if the loan was issued or
guaranteed under a Federal post-secondary education program.
The 60-month period continues to pass whether or not the required
interest payments are actually made. However, the 60 months may or may
not be consecutive. For more information, see Suspension of
60-month period, later.
Effect of refinancing.
Generally, the refinancing of a student loan has no effect on the
60-month period. All refinancings of a student loan are the same loan
for the purposes of determining the 60-month period. A refinanced loan
has the same 60-month period as the original loan. See
Consolidated loan and Collapsed loans, next.
Consolidated loan.
This is a loan that refinances more than one student loan of the
same borrower. The 60-month period for a consolidated loan begins on
the most recent date on which interest payments became due on any of
the refinanced loans.
Collapsed loans.
These are two or more loans of the same borrower that are treated
by both the lender and the borrower as one loan. The 60-month period
for a collapsed loan begins on the most recent date on which interest
payments became due on any of the separate loans.
Suspension of 60-month period.
The 60-month period is suspended for any period of time during
which interest payments are not required by the lender. However, the
60-month period is not suspended if, under the terms of the loan both
of the following statements are true.
- Interest continues to accrue (be charged) even though the
payments are not required.
- You keep making interest payments even though you are not
required to do so.
If you refinance, consolidate, or collapse a student loan, the new
loan can also be a student loan. But refinancing, consolidating, or
collapsing a loan does not extend the 60-month period described
earlier. The 60-month period is based on the original loan.
Exception.
If a student loan was not issued or guaranteed under a federal
postsecondary education loan program, the 60-month period is suspended
only if the borrower meets certain conditions. Those conditions
include:
- Half-time study at a postsecondary educational
institution,
- Study in an approved graduate fellowship program,
- Study in an approved rehabilitation program for the
disabled,
- Inability to find full-time employment,
- Economic hardship, and
- The performance of services in certain occupations or
federal programs.
Example.
You took out a student loan in 1993. You made a payment on the loan
every month, as required, beginning October 1, 1995. You can deduct
the interest on your first nine payments for 2000. You cannot deduct
the interest on any later payments because they are after the 60-month
period (October 1, 1995 - September 30, 2000).
Who Cannot Claim the Deduction?
You cannot claim a deduction for student loan interest if any of
the following apply.
- Your filing status is married filing a separate
return.
- You are a dependent for whom an exemption is claimed
on the tax return of another person.
- The interest was paid on a loan from a related
person.
- The interest was paid on a loan from a qualified
employer plan.
Dependent for whom an exemption is claimed.
You are a dependent for whom an exemption is claimed on another
person's tax return if another taxpayer lists your name on line 6c of
their Form 1040 (or Form 1040A).
Loan from related person.
You cannot deduct interest on a loan you get from a related person.
Related persons include your brothers and sisters, half brothers and
half sisters, spouse, ancestors (parents, grandparents, etc.), and
lineal descendants (children, grandchildren, etc.). Related persons
also include certain corporations, partnerships, trusts, and exempt
organizations.
Loan from a qualified employer plan.
You cannot deduct interest on a loan made under a qualified
employer plan or under a contract purchased under such a plan.
How Is the Deduction Figured and Reported?
Your student loan interest deduction for 2000 is generally the
smaller of:
- $2,000, or
- Your interest payments that were both:
- Paid in 2000, and
- Paid during the first 60 months that interest payments were
required.
However, the amount determined above may be phased out
(gradually reduced) or eliminated based on your filing status and
modified adjusted gross income as explained later under Does
Income Affect the Amount of Your Deduction?
Maximum Deduction
Your deduction for 2000 cannot be more than $2,000. This limit
increases to $2,500 for 2001 and later years.
Does Income Affect the Amount of Your Deduction?
The amount of your student loan interest deduction is phased out
(gradually reduced) if your modified adjusted gross income is between
$40,000 and $55,000 ($60,000 and $75,000 if you file a joint return).
You cannot take a student loan interest deduction if your modified
adjusted gross income is $55,000 or more ($75,000 or more if you file
a joint return).
The following chart describes the affect the amount of your
modified adjusted gross income has on the student loan interest
deduction you are allowed to claim.
Phaseout of Deduction
Modified adjusted gross income.
For most taxpayers, modified adjusted gross income will be their
adjusted gross income (AGI) as figured on their federal income tax
return but without the deduction for student loan interest. On Form
1040, AGI is line 33. On Form 1040A, AGI is line 19. However, you must
make adjustments to your AGI if you excluded income earned abroad or
from certain U.S. territories or possessions. If this applies to you,
increase your AGI by the following amounts you excluded from your
income.
- Foreign earned income of U.S. citizens or residents living
abroad.
- Housing costs of U.S. citizens or residents living
abroad.
- Income from sources within Puerto Rico, Guam, American
Samoa, or the Northern Mariana Islands.
How the phaseout works.
To figure the phaseout, multiply your interest deduction (before
the phaseout) by a fraction. The numerator is your modified adjusted
gross income minus $40,000 ($60,000 in the case of a joint return).
The denominator is $15,000. Subtract the result from your deduction
(before the phaseout). This result is the amount you can deduct.
Example 1.
During 2000 you paid $800 interest on a qualified student loan.
Your 2000 modified adjusted gross income is $67,500 and you are filing
a joint return. You must reduce your deduction by $400, figured as
follows.
$800 times ($67,500 minus $60,000) divided by $15,000 equals $400:
$67,500 - $60,000
$800 × ------------------- = $400
$15,000
You can deduct $400 ($800 - $400).
Example 2.
The facts are the same as in Example 1 except that you
paid $2,200 interest. Your maximum deduction for 2000 is $2,000. You
must reduce your maximum deduction by $1,000, figured as follows.
$2,000 times ($67,500 minus $60,000) divided by $15,000 equals $1,000:
$67,500 - $60,000
$2,000 × ------------------- = $1000
$15,000
You can deduct $1,000 ($2000 - $1,000).
How Do You Report the Deduction?
The student loan interest deduction is an adjustment to income. To
claim the deduction, enter the allowable amount on line 24 of Form
1040, or line 17 of Form 1040A.
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