The first on the list of deductions is the Student Loan Interest Deduction; which allows an individual to deduct any interest actually paid on a student loan during the calendar year. Certain conditions must be met in order for this to apply; one of those being that the maximum deduction must be ,500.
This is actually an "above the line" adjustment, which means you do not need to itemize your other deductions to get it. In other words, you can take the standard deduction and still deduct your interest.
The actual amount requires the use of a more complex formula, but the basic premise is simple. Basically, you can only deduct the portion of each payment that represents interest.
Any fees that have to be paid up front to receive the loan, such as origination fees, may also be deducted over the life of the credit. Certain types of credits do not qualify for the Student Loan Interest Deduction.
These may include a credit taken from a qualified plan such as a 401k, 403b, 457, etc. In addition, it cannot include loans made between related parties, such as a grandparent to their grandchild.
As a stipulation, the money received for the loan must be used only for tuition, room, board, books, or fees. In order for the interest accrued to be deductible, your filing status cannot be "Married Filing Separately."
No one else can claim you as an exemption on his or her tax return and you are legally obligated to pay the interest on the student loan. You must have actually paid the interest; which means that any accumulation of interest on your balance by itself is not deductible.
One of the most common misunderstandings about the Student Loan Interest Deduction is that a parent can claim it for helping make payments on their child's loan. The truth is that a parent can only take the deduction if they are personally liable for that account.
This means that Stafford, Perkins, and PLUS Graduate loans will not be deductible to a parent since the student is the borrower. The Student Loan Interest Deduction is reduced or phased-out for taxpayers with certain levels of Modified Adjusted Gross Income (MAGI).
Since there is no rule to the contrary, the Student Loan Interest Deduction can be taken in the same year as the Hope Scholarship and Lifetime Learning Tax Credits. There is a "double dipping" rule however, that prohibits deducting the accrual twice if it qualifies for a separate type of deduction.
There is even more confusion when it comes to paying for college and the annual gift tax exclusion. To start off, anyone is allowed to pay unlimited educational or medical bills of any other person without having to worry about the annual gift limit.
This rule applies whether or not the student is related to them or not. The only requirement is that the payment be made directly to the institution and not to the individual.
In other words, your Grandma can pay ,000 in tuition directly to their grandchild's school and it is completely outside of the gift and estate tax rules. Grandma's ,000 annual gift -paid directly to the individual - exclusion has not been used by this transaction.
In fact, Grandma could still give ,000 directly to the child without worrying about going over the gifting limit. The place that the annual gift exclusion limit does matter is in the funding of Section 529 plans.
If someone puts more than the annual gift limit into a Section 529 account, it may reduce his or her estate tax exemption. However, the IRS currently allows an exception in which someone can put five years worth of their annual gift exemption into a plan in one shot.
Remember also, that this is per donor; so grandma could put in five years' worth for a child and Grandpa could also put in five years' worth of annual gift tax exclusions. Keep in mind; however, they could not give any additional gifts to that child within the following five years.