Taxpayers may deduct from their gross income certain interest they pay on a qualified education loan, according to Section 221 of the Internal Revenue Code.
This deduction is known as an “above the line” deduction because it is a deduction on page one of your tax return. You do not have to file a Schedule A and itemize your deductions to claim this one.
You need to meet the criteria to claim this deduction. One requirement is that you be the taxpayer who has a legal obligation to make interest payments on the loan. The person whose name is on the promissory note has the legal obligation.
For example, if your parents paid your student loan payments for you, they would not be entitled to a deduction on their tax return because they do not have a legal obligation to make student loan payments. Their dependent child does.
Another criterion is that you cannot be claimed as a dependent by another person. Otherwise, the student loan interest deduction will be disallowed. You must be an independent taxpayer to claim this deduction.
Some criteria apply to married taxpayers. To claim the student loan interest deduction, the married taxpayers need to file a joint tax return. If they file married filing separately, they receive no deduction.
If a third party makes student loan payments on behalf of a taxpayer who is legally obligated to make the payment, the taxpayer is treated as having made the payment. The taxpayer is allowed the student loan interest deduction.
The theory behind this is that the third party has made a gift to the taxpayer. The taxpayer then used that gift to make the student loan payment. Therefore, the taxpayer receives the deduction.
The maximum amount of the deduction is $2,500 regardless of your filing status. Single taxpayers and married taxpayers filing a joint return have the same ceiling on the amount of student loan interest they can deduct.
There are also some income limitations regarding the deduction. For 2014, single taxpayers with modified adjusted gross income in excess of $80,000 and married taxpayers filing jointly with modified adjusted gross income over $160,000 are not eligible for the deduction.