Each year about this time, mailboxes across America are filled with tax forms. Sometimes, those tax forms go straight to a tax professional, unopened. Other times, taxpayers may dutifully open those forms and type the information, box for box, into tax preparation software. In both cases, it's not unusual for taxpayers to not have an understanding of the meaning of all of the numbers, letters and other information on those forms. That's about to change.
This week, I'll be dissecting some of the most basic tax forms for you. The more you know, the less scary some of these forms can be.
A form 1098-E, Student Loan Interest Statement, is used to report interest of $600 or more paid to a lender for a student loan.
Your identifying information and the identifying information of the lender are reported on the left side of the form. Your Social Security Number may also be on the form - or just the last few digits. The first digits of the number may be redacted for your privacy.
The financial information is reported on the right side of the form and it's really brief. Crazy brief. It's just one number. In box 1, your lender reports the interest received by you during the year. This is not the total of your payments during the year: principal is not reported on this form.
If your loan is made on or after September 1, 2004, box 1 may also include loan origination fees and capitalized interest received during the year. If your loan was made before September 1, 2004, you may be able to deduct loan origination fees and capitalized interest not reported in box 1 - you'll also see a check in box 2.
The purpose of the form is help you out when you prepare your taxes: you are allowed for paying interest on a student loan taken out to pay higher education expenses. The student loan interest deduction is available even if you don’t itemize. It’s technically an adjustment to income but is sometimes called an "above the line" deduction since you reduce your taxable income on the front page of your return without regard to any deductions claimed on a Schedule A.
You'll report the amount of the deduction at line 33 on your form 1040. That amount is probably a lot less than what you see on that form 1098-E. That's primarily for two reasons:
- There is a cap on the amount of interest you can claim each year. You can reduce your income subject to tax by up to $2,500 of qualified student loan interest annually. This amount includes both required and voluntary interest payments.
- There are limits and phaseouts depending on your income. For 2014, the student loan interest deduction is phased out (reduced) if your modified adjusted gross income (MAGI) is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return); you cannot take the student loan interest deduction at all if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). For 2015, phaseouts apply for taxpayers with MAGI in excess of $65,000 ($130,000 for joint returns), and is completely phased out for taxpayers with MAGI of $80,000 or more ($160,000 or more for joint returns).
There are some additional limitations. Your student loan must have been taken out solely to pay qualified education expenses, including tuition and fees; books, supplies, and equipment; and other necessary expenses such as transportation. Room and board may also be included if the cost is not more than the allowance for room and board included in the cost of attendance at your school for federal financial aid purposes or the actual amount charged if you live in housing owned or operated by your school.
As with other education tax breaks, you must reduce your qualified education expenses by the total amount paid for employer-provided educational assistance; tax-free distribution of earnings from a Coverdell education savings account or a qualified tuition program (QTP); U.S. savings bond interest previously excluded from income; tax free scholarships, fellowships and grants; and veteran’s benefits.
For purposes of the deduction, the student who borrowed the funds must be you, your spouse, or your dependent, and must have been enrolled at least half-time in a degree program when the loan was taken. For purposes of the deduction, an individual can be your dependent even if you are the dependent of another taxpayer; even if the individual files a joint return with a spouse and even if the individual had gross income for the year that was equal to or more than the exemption amount for the year.
You may not deduct your student loan interest if you file as married filing separately or if someone else claims an exemption for you on his or her tax return.
A few more things: the loan does not have to come solely from PHEAA or another institutional student loan provider. You can include other debt, such as credit cards and line of credit IF you use it only to pay student debt: in other words, don’t mix your educational expenses with other personal expenses. Bank and other loans also qualify but the borrowed funds cannot be from a related person or made under a qualified employer plan. Of course, those won't show up on the form 1098-E.
This is the best part: if someone else makes a student loan payment on your behalf, it’s treated, for federal income tax purposes, as though you made the payment. If, for example, your mom and dad pay some of your loans, you can still claim the interest for purposes of the deduction (but be careful and read the criteria above: if your parent claims you as a dependent but you are legally obligated to pay the loan, then neither one of you can take the deduction).
For more details on other tax forms, like the forms 1098-T and 1099, check out the rest of the series this week:
