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TAXPAYER RELIEF ACT
 

Student loan interest deduction and other tax benefits under the 1997 Taxpayer Relief Act, began January 1, 1998. Taxpayers who have taken loans to pay the cost of attending eligible educational institutions for themselves, their spouses, or their dependents may be eligible to deduct interest they have paid on these student loans. In addition, this Act provides students and families other new tax benefits which include:

  • Hope Scholarship Credits
  • Lifetime Learning Credits
  • Education IRAs
  • Penalty-free IRA Withdrawals
  • Qualified State Tuition Programs

Taxpayers seeking advice on how to make the best use of these benefits may wish to consult a qualified tax advisor. Information on education loan deductibility taken from the IRS Publication 970 is provided below. For more detailed information regarding the 1997 Taxpayer Relief Act, you should call the IRS or visit their Web site. (See below for IRS contact information)

Summary of Deductibility of Education Loan Interest

Under the 1997 Taxpayer Relief Act, beginning January 1, 1998, taxpayers who have taken loans to pay the cost of attending an eligible educational institution for themselves, their spouses, or their dependents may be eligible to deduct interest they have paid on these student loans. The maximum each taxpayer is permitted to take increases from $1,000 in 1998 to $1,500 in 1999, $2,000 in 2000, and $2,500 for 2001 and later years. The deduction may be limited depending on the amount of modified adjusted income.  For tax years 1998 through 2001, the deduction was available only for interest payments made during the first 60 months in which interest payments were required on the loan. For the tax year 2002 and subsequent any and all interest paid on the loan from January 1, through December 31, may be tax deductible.

In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be considered student loan interest.

Loan origination fee. In general, this is a one-time fee charged by the lender when a loan is made. To be deductible as interest, a loan origination fee must be for use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the term of the loan.

Capitalized Interest. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.

The IRS stipulates borrowers who wish to deduct their student loan interest paid must meet certain eligibility criteria.  Per IRS regulations, ACS will mail a 1098-E year-end tax statement by January 31st to all eligible borrowers.  Under this Act, the first time taxpayers will be able to claim the deduction is when the 1998 tax return is filed. Interest paid prior to 1998 is not tax deductible. Previously, interest paid on loans in deferment, forbearance, or in grace status was not included in interest reported to the IRS. Within the current guidelines, any interest payments made during the 2002 tax year forward, regardless of the status of the loan, are possibly eligible for deduction if specific IRS eligibility criteria are met. To find additional information regarding eligibility criteria and whether you qualify for the deduction, you may:

  • Refer to Internal Revenue Publication 970, Tax Benefits for Education
  • Visit the IRS Website at www.irs.ustreas.gov
  • Call the IRS toll free at 1-800-TAX-1040 (1-800-829-1040)

To order publications and forms, call 1-800-TAX-FORM (1-800-829-3676).

TYY or TTD users, dial 1-800-829-4059 for questions and ordering publications.

For further assistance seek a tax advisor or contact the IRS.