Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next
Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121598  
Subject: Re: Student Loan/Education Deductable? Date: 3/4/1998 8:36 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
[[In 1996 I borrowed money (in the form of student loans) to pay for a educational expenses,
realated to my line of employment. The majority of the classroom hours were in 1997
(approximately 85% of the hours).

I've been planning to use the itemized deduction on 85% of the course cost on my 1997 tax return,
but a friend of mine challenged the legality of said deduction. He belived that only the portion of my
student loan that I repaid in 1997 would be deductable.

Does someone out there know if the course cost is deductable when I took out a loan to pay for it -
or would it just the part of loan I paid back during 1997 that is deductable?]]

While the cost of the education (when paid...not necessarily when incurred) may or may not be deductible based upon the rules regarding education expenses (See IRS Publication 508 for additional information on the deductiblity of education expenses), the interest itself is NOT deductible on your Schedule A. Just as interest on an auto loan used partially for business (when you are an employee), the interest on the student loan would also be considered a non-deductible personal interest.

But there is a recent new law that may allow you to deduct some of the interest expense as an adjustment to income (i.e., you don't have to itemize your deductions to get the interest deduction). Here are the highlights...

Deduction for Interest on Qualified Higher Education Loans

There is a new interest deduction in town which was recently introduced by the 1997 Taxpayer Relief Act: interest on qualified education loans. The deduction applies to interest due and paid after 1997 on loans taken out on, before, or after Aug. 5, 1997. This being the case, you may qualify for this deduction for interest you pay after 1997 on existing loans. (But you can't take a deduction for interest due after 1997 that you pay in advance in 1997.)

The deduction is a much different from the general rule that interest on "personal" loans isn't deductible (except, in most cases, for mortgage interest on your home). Here are the requirements for deductibility: The maximum amount of interest you can deduct is $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 or later. The maximum isn't adjusted for inflation. However, the deductible amount is reduced for certain high Adjusted Gross Income (AGI) taxpayers. We'll deal with those restrictions below.

The interest must be for a "qualified education loan," i.e., for a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain post-graduate programs also qualify. Thus, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital, or health care facility offering post-graduate training can qualify.

But note: Only interest paid during the first 60 months that payments are required can qualify. Months in which payments aren't required, e.g., during a deferral or forbearance period, aren't counted against the 60-month period. In the case of an already existing loan, interest payments qualify for the deduction to the extent that the 60-month period has not yet expired. But months during which interest was paid before Jan. 1, 1998 would count against the 60-month period. For this purpose, a loan and all refinancings of the loan are treated as a single loan.

Income Limitations: The deduction is only fully allowed for taxpayers (married filing jointly) with Adjusted Gross Income (AGI) of $60,000 or less. For taxpayers with AGI of $75,000 or more, no deduction is allowed. If AGI is between $60,000 and $75,000 the deduction is partially reduced, depending on how far above $60,000 the taxpayer's AGI happens to be. Example: if AGI is $65,000, the deduction is reduced by 33 1/3% since the $5,000 excess above $15,000 represents 33 1/3% of the $15,000 excess that would result in complete disallowance.

For other taxpayers, e.g., single taxpayers, a full deduction is allowed if AGI is $40,000 or less, no deduction is allowed if AGI is $55,000 or more, and a similar partial disallowance approach is taken where AGI is between $40,000 and $55,000. (For these purposes, AGI is computed with certain modifications, e.g., the exclusion of income from U.S. savings bonds used to pay higher education costs isn't taken into account.) The $60,000 (and $40,000) "phase-out" amounts discussed above will be adjusted for inflation for years after the year 2002.

Married taxpayers must file jointly or no deduction is allowed. Also, no deduction is allowed by a taxpayer who can be claimed as a dependent on the tax return of someone else. Where a deduction is allowed, it is taken "above the line," i.e., it is subtracted from gross income to determine AGI. Because of this "above the line" treatment, the interest deduction can be used by everybody that qualifies for it, regardless of if deductions are itemized or not.

There are other requirements: The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his spouse or dependent. The expenses must be for education furnished while the recipient was an "eligible student," i.e., at least a half-time student. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

But there are some further examples and illustrations that might help your understanding.

First, remember that the person must be your dependent when the loan is made, but there are no similar provisions when the loan is paid. For example, say that you took out a loan to pay for your daughter Sally's qualified education. Sally was your dependent at the time that you took out the loan, but has since graduated, is working, and is no longer your dependent. You can still deduct the interest that you pay on the loan (assuming that you otherwise qualify to do so) because Sally was your dependent when you made the loan.

Let's also take a closer look at the 60-month rule. While you can only deduct higher education interest during the first 60 months in which interest payments are required, those 60 months don't have to be consecutive. And months in which the loan is in deferral don't count against the 60-month period. For example, after paying interest on a college loan for 25 months, you decide to go back to school. Under the terms of the loan, payments are deferred during the time you are in school. When you resume making loan payments after your schooling ends, you will still have 35 months of deductible interest remaining.

But remember that if you refinance a loan, the months that have elapsed on the original loan are carried over to the new loan. For example, lets say that you have been paying off your qualified loan for the last 20 months, and you decide to refinance to take advantage of a lower interest rate. While the refinanced loan is "new", it is treated as a continuation of the original loan. This being the case, you will have only 40 months of remaining deductible interest.

And finally, remember that if you already have a higher education loan outstanding, you may STILL be able to deduct up to 60 months of interest, depending upon when the loan payment began. In some cases, interest payments on loans taken out may years ago will still be deductible in 1998. Example: you began paying off a higher education loan in July, 1994, 42 months before January, 1998 when the interest deduction takes effect. You will still be able to deduct a full 12 months of interest in 1998, and another 6 months in 1999 before your 60-month period expires.

So while these provisions can be a little tricky, it may certainly be worth your while to look further into your ability to qualify for this deduction.

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Looking at Currency Ratios
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement