In addition to qualifications for claiming this deduction, there are also a few other details you'll need to know when determining whether it applies to you.
On the last page you learned that, as a student, you can't claim this deduction if someone else claims you as a dependent on his or her tax return. However, if the student is your dependent, you might qualify to use the deduction. Unfortunately, if the dependent is the only one "legally obligated" to make payments, neither you nor the dependent may claim the deduction. Also, if anyone makes a loan payment on behalf of the student, the student can actually claim that as a deduction -- as long as the student is not claimed as a dependent on someone else's return. This is because the IRS treats this as a gift to the student, which is then paid toward the loan.
This complicated tax benefit will be somewhat simplified with the 1098-E form you should receive in the mail from the bank or lending institution where you send your loan payments. However, if your interest payments are small enough, the lending institution isn't required to send you an 1098-E, in which case you should use your loan statements to calculate your interest payments [source: IRS].
In some cases, the 1098-E will not show the correct amount you paid in interest (for tax purposes) because certain other things may apply toward deductible interest. If your loan was made before September 2004, for instance, the lending institution isn't required to list the loan origination fee on the 1098-E, which may qualify as interest (if it wasn't used toward property or services such as commitment fees or processing costs). If this is the case, or if you didn't receive a 1098-E, you can use a "reasonable method" to determine how much you paid toward the origination fee in a particular tax year -- Publication 970 gives a helpful example of how to do this [source: IRS].
Other things that count toward deductible interest include:
- Capitalized interest -- interest you haven't paid yet that is added to the principal of the loan payment
- Voluntary interest payments -- loan payments made before they are required
- Refinanced student loan interest -- such as consolidated or collapsed student loans (so long as you don't borrow more money in the process that isn't used toward qualified education expenses)
For the latest rules, details and examples refer to the IRS Publication 970 [source: IRS]. For more tax-related articles, browse the links on the next page.