Student Loan Deductions - Education Incentives:

Changes made to the tax code on May 7, 2004 created the following changes for deducting loan interest due and paid on qualifying student loans after December 31, 1997:

1. The 60-day safe harbor for disbursing loan proceeds used to pay qualified education expenses has been increased to 90 days before and 90 days after the academic period to which the expenses relate
2. Interest paid by a third party may be deductible. The person legally obligated to make interest payments on a student loan may be able to deduct interest payments on that loan made by someone else (third party)

Students may deduct up to $2,500 for interest paid on these loans on their tax returns. The deduction is claimed as an adjustment to income, so taxpayers do not need to itemize their deductions on Schedule A (Form 1040) of their tax returns.

Qualified higher education expenses are the costs of attending an eligible educational institution, including graduate school. These costs have to be reduced by non-taxable employer-provided assistance benefits, non-taxable distributions from an education IRA, qualified scholarships that are non-taxable, veterans educational assistance benefits, etc. Please refer to tax guides for all categories.

A student's loan interest deduction for 2004 is generally the smaller of $2,500, or the amount of interest you paid in 2004. The amount of the deduction is phased out (gradually reduced) for modified adjusted gross incomes between $50,000 and $65,000 ($100,000 and $130,000 if you file a joint return). Taxpayers with modified adjusted gross income over $65,000 ($130,000 married filing jointly) may not deduct student loan interest.