How to Handle Your Student Loan Deductions
NEW YORK ( TheStreet) -- You can claim up to $2,500 in interest paid on qualified student loans used to pay for post-secondary education -- college or vocational school -- for yourself, your spouse or your dependent as an "above the line" deduction on your 2012 Form 1040.
To claim a deduction you must be legally obligated to repay the loan and you must actually make the payments. In many cases the student, if a dependent, and the parents are both legally obligated to repay the loan. In such a case the deduction is allowable to whoever makes the payments.
If you are claimed as a dependent on the tax return or your parents or anyone else, you cannot deduct student loan interest on your return.
The amount you can deduct is phased out as your "modified" Adjusted Gross Income goes from $60,000 to $75,000 if you are single or from $125,000 to $155,000 on a joint return.You cannot claim the deduction if you are married filing separately.Student loan interest paid is reported on Form 1098-E. I recently had a situation where the Form 1098-E was issued in the name and Social Security number of the student. But the parents were also named on the loan and had a legal obligation to repay it, and they made all the loan payments for the year. The student could not deduct the interest on her return. But I did claim a deduction for the interest paid, subject to the $2,500 limitation (which was further reduced by the MAGI phaseout), on the parents' Form 1040. Interest on a loan from a related party or from a qualified employer plan, such as a 401(k), are not deductible.
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