Student loan interest deduction

October 1, 2006 2:31 PM

I recently found out that when filing my tax returns I can deduct interest paid on my student loans. My question is if I have to file my request for a deduction the same year I pay the interest, or can I wait a couple years to actually take the deduction? Here's the twister: I'm a dependent. Can I make interest payments now and deduct them from my taxes a few years down the road when I'm an independent. Does being a dependent bar me from currently taking a deduction? Thank you...I really appreciate any help.
posted by speedoavenger to work & money (11 answers total)

Where are you filing taxes?
posted by Mitheral at 2:34 PM on October 1, 2006

Are you receiving an annual student loan interest statement (form 1098-E, at least for the type of loan I have) from your lender?
posted by scody at 2:40 PM on October 1, 2006

I am filing my state taxes with AZ and federal with good old uncle sam.

I did receive a 1098-E for 2005 showing that I paid $39.51 in interest. My Sallie Mae loan account summary shows that I have accrued interest in the amount of $379.79. I want to pay the full amount, and then write it all off.
posted by speedoavenger at 2:46 PM on October 1, 2006

Does being a dependent bar me from currently taking a deduction?

Yes.

As for the question of when you could take the deduction, generally speaking you can only take a deduction in the year that it is incurred. I do not think you can save up deductions for a later filing date when you are no longer a dependent on somebody else's taxes. But I am still looking in to this.
posted by brain cloud at 2:52 PM on October 1, 2006

Does being a dependent bar me from currently taking a deduction?

Yes.


If that is the case, I just won't make any payments on my student loans until they are out of deferrment, which won't happen for another two years! I'm 22 right now, so by the time my deferrment expires I will be independent and be required to make interest payments. I should qualify for interest deduction at that point in time.

P.S. Doesn't having a student loan interest deduction program kind of defeat the purpose of subsidized and unsubsidized loans? From my understanding, if you play your cards right, you can avoid paying interest on both types of loans.
posted by speedoavenger at 3:28 PM on October 1, 2006

Doesn't having a student loan interest deduction program kind of defeat the purpose of subsidized and unsubsidized loans? From my understanding, if you play your cards right, you can avoid paying interest on both types of loans.

"Taking a deduction" doesn't mean you reduce your taxes by that much (that would be a "tax credit"). It means that you reduce your taxable income by that amount so that e.g., if you're in a 10% tax bracket, you reduce your taxes by 10% of the interest you paid.

And if you're still a dependent, I doubt you'll be in a position to itemize your deductions any time soon. There's a $5,000 standard deduction, and you can either itemize your deductions or take the standard deduction -- not both.

Kudos to you, though, for thinking about these things at your age.
posted by Doofus Magoo at 3:49 PM on October 1, 2006

To add on to what Doofus Magoo said, student loan interest paid is an adjustment to income before the standard or itemized deduction is taken. (Line 33 on 2005 Form 1040).

In my previous comment I referred to it as a deduction but that was not technically correct. However the same rule still applies -- as long as you are listed as a dependent, you can't use your student loan interest to calculate AGI.
posted by brain cloud at 4:05 PM on October 1, 2006

(Forgot to add: on the actual tax form, it is referred to as "Student Loan Interest deduction.")
posted by brain cloud at 4:06 PM on October 1, 2006

I may not be remembering 100% correctly, and your situation may vary, but last year I paid more than $600 in student loan interest, and I got an extra $20 back in taxes for it. I know because I ran it both ways since I was curious about difference.
posted by peep at 4:15 PM on October 1, 2006

And if you're still a dependent, I doubt you'll be in a position to itemize your deductions any time soon. There's a $5,000 standard deduction, and you can either itemize your deductions or take the standard deduction -- not both.

That shouldn't make a difference in regards to student loan deductions. It's not itemized, it's taken off the first page of the 1040 or 1040A. (but yeah, can't take it at all if you're a dependant.)
posted by Kellydamnit at 4:39 AM on October 2, 2006

First off, don't make interest payments on your federal loans if you don't have to. Most likely, the rate you are getting is a very low rate, and it's the best long-term loan you'll get.

Secondly, don't let your parents tell you that you are a dependent if you are not one. If they aren't paying your bills, then they don't deserve the tax break - unless your folks are splitting the savings with you. I'd tell them to pony up the dough or let me file my own taxes. You're old enough to learn to do it, and it's a lot easier to read the books and fill out the forms when your finances are pretty simple.
posted by MrZero at 8:42 AM on October 2, 2006