Tax Deductible Loans

If you have student loans you are paying off, it is common to forget that there are taxes that you will have to pay in conjunction with these loans. Interest paid on a student loan could be tax deductible. Your lender will send you a Form 1098-E. The amount of interest you paid on your student loans for the year will be reported on Form 1098-E, box 1.

The maximum amount of student loan interest you can claim is $2,500 per year. When tax time comes around, make sure that you do not forget that the interest you paid on your student loans in 2005 may be tax deductible. You may be able to deduct up to $2,500 of the interest you paid on your student loans in 2005. The $2,500 is a cap on what you can deduct, so, even if you paid more, you will be able to deduct at most $2,500.

This deduction will help reduce your taxable income, shrinking the amount of tax you will owe. Keep in mind that there are a few requirements to be eligible for this deduction. The amount of the deduction is reduced and then eliminated based on your income. If you are single, the deduction is reduced between $50,000 and $65,000, and completely eliminated if your income exceeds $65,000. In other words, if you make less than $50,000 you can deduct up to the full $2,500.

If you income falls in between $50,000 and $65,000 you will be able to deduct less than $2,500 (the reduction is proportionate to the higher your income falls in that range) and if your income exceeds $65,000 you won't be able to deduct any student loan interest. The income phase-out range for married couples filing jointly is $105,000 to $135,000, and married couple must file jointly to be eligible.

Keep in mind that you do not have to itemize deductions to qualify, but it is not available if you use Form 1040EZ to file your return. The loan must have been to pay for real school expenses i.e. tuition, room and board, and books and supplies.

You need to have been enrolled in an eligible school (generally all accredited public, private and for-profit postsecondary schools) at least half time at the time you took out the loan. You cannot deduct interest on a loan you received from a relative.