July 18, 2019
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If a loan is not subsidized, guaranteed, financed, or otherwise treated as a student loan under a program of the federal, state, or local government or an eligible educational institution, a payee (the lender) must request a certification from the payer (the borrower) that the loan will be used solely to pay for qualified higher-education expenses. Form W-9S, Request for Student’s or Borrower’s Social Security Number and Certification, is provided by the IRS for this purpose.
You can claim a deduction for student loan interest whether you claim the standard deduction or you itemize your deductions since it is an adjustment to income, often referred to as an above-the-line deduction.
To qualify as an eligible loan, the loan must have been taken out solely to pay the costs of attending an eligible educational institution for an individual during a period when the individual is a qualified student . Eligible costs include:
Eligible student – An eligible student is one enrolled in a degree or certificate program who is at least a half-time student. What constitutes half the normal course load will be determined by the definition of the school being attended. Generally, a full-time student is one carrying at least 12 units.
Who Claims the Interest – The above-the-line interest deduction may only be claimed by a person who is legally obligated to make the payments on the qualified educational loan. However, tax regulations allow payments on above-the-line education interest made by someone other than the taxpayer/borrower to be treated as a gift, allowing the interest to be deductible by the taxpayer.
Not Available to Higher-Income Taxpayers – The deduction is ratably phased-out for taxpayers with an AGI (income) of $70,000 to $85,000 ($140,000 to $170,000 for joint returns) and not allowed at all for taxpayers filing as married separate or an individual who is a dependent of another. The amounts shown are for 2019; contact this office for the amounts for other years.
If you are considering borrowing money to pay for higher-education expenses, it may be appropriate to consult with this office since there are other limitations. Please call for assistance.
- Home Equity Loan
- Home Equity Interest Deduction
- Alternative Minimum Tax
- Above-the-Line Interest Deduction
- Qualified Expenses
Example #1
– Jack takes out an equity line of credit on his home and borrows $30,000 to finance a solar electric installation on his home and $10,000 to pay his daughter’s qualified education expenses. Because this loan is not used for a single purpose (he used it to borrow funds for more than education), he cannot deduct a portion of the interest as above-the-line education loan interest. However, Jack can still deduct the prorated interest on the solar installation as home-acquisition debt if the total debt does not exceed the acquisition debt limits. If Jack had only used the loan to pay for qualified education expenses, then up to $2,500 of the loan interest could have been deducted as above-the-line student loan interest.
Example #2 – Mark has a Visa card that he uses for a variety of purposes, and he also uses it to pay his daughter’s qualified education expenses. Because the credit card is not used exclusively to pay for qualified education expenses, none of the interest will qualify as student loan interest. However, if Jack had only used the credit card to pay for qualified education expenses, then up to $2,500 of the credit card interest could have been deducted as above-the-line student loan interest. Caution: Although we use a credit card as an example of an alternate student loan, it is not practical because of the high interest rates.
Example #2 – Mark has a Visa card that he uses for a variety of purposes, and he also uses it to pay his daughter’s qualified education expenses. Because the credit card is not used exclusively to pay for qualified education expenses, none of the interest will qualify as student loan interest. However, if Jack had only used the credit card to pay for qualified education expenses, then up to $2,500 of the credit card interest could have been deducted as above-the-line student loan interest. Caution: Although we use a credit card as an example of an alternate student loan, it is not practical because of the high interest rates.
If a loan is not subsidized, guaranteed, financed, or otherwise treated as a student loan under a program of the federal, state, or local government or an eligible educational institution, a payee (the lender) must request a certification from the payer (the borrower) that the loan will be used solely to pay for qualified higher-education expenses. Form W-9S, Request for Student’s or Borrower’s Social Security Number and Certification, is provided by the IRS for this purpose.
You can claim a deduction for student loan interest whether you claim the standard deduction or you itemize your deductions since it is an adjustment to income, often referred to as an above-the-line deduction.
To qualify as an eligible loan, the loan must have been taken out solely to pay the costs of attending an eligible educational institution for an individual during a period when the individual is a qualified student . Eligible costs include:
- Tuition
- Fees
- Room and board
- Books and equipment
- Other necessary expenses (including transportation)
-
The expenses are paid with the proceeds of a loan from a federal post-secondary education loan program; or
- The expenses are related to a particular academic period and the loan proceeds used to pay the expenses are disbursed within a period that begins 90 days prior to the start of, and ends 90 days after the end of, that academic period. A home equity line of credit can be used to meet these requirements by paying education expenses as they become due, provided that the loan is not used for any other purpose.
-
Income excluded from
employer-provided educational assistance
;
-
Income excluded from
U.S. savings bonds
used to pay higher-education expenses;
-
Nontaxable distributions from
Coverdell ESAs
; and
- Scholarships, allowances, or other payments (such as distributions from Sec. 529 plans) that are excludable from gross income.
Eligible student – An eligible student is one enrolled in a degree or certificate program who is at least a half-time student. What constitutes half the normal course load will be determined by the definition of the school being attended. Generally, a full-time student is one carrying at least 12 units.
Who Claims the Interest – The above-the-line interest deduction may only be claimed by a person who is legally obligated to make the payments on the qualified educational loan. However, tax regulations allow payments on above-the-line education interest made by someone other than the taxpayer/borrower to be treated as a gift, allowing the interest to be deductible by the taxpayer.
Not Available to Higher-Income Taxpayers – The deduction is ratably phased-out for taxpayers with an AGI (income) of $70,000 to $85,000 ($140,000 to $170,000 for joint returns) and not allowed at all for taxpayers filing as married separate or an individual who is a dependent of another. The amounts shown are for 2019; contact this office for the amounts for other years.
If you are considering borrowing money to pay for higher-education expenses, it may be appropriate to consult with this office since there are other limitations. Please call for assistance.
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