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Posted by A.G. Kalman on May 10, 2007, 11:54 pm
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satellite_chris wrote:
> I am confused about how a student loan plans in to the tax
> deduction eligibility. I have a couple different scenarios
> that I need some help with to make sure I don't cheat myself
> out of the tax benefits when paying for my graduate school.
> This is my first year of graduate school so I am not familar
> with past 1098-T's.
>
> Scenario A (The obvious)
> I pay my graduate school bills entirely through cash or
> credit card or even a private loan. I should be able to
> claim up to the full $4000 as a tax deduction assuming the
> 2007 laws match 2006.
>
> Scenario B
> Graduate school is paid by my Stafford loan entirely in
> 2007. I pay only the interest each month. My assumption is
> that I can only claim the interest that I paid, is that
> true? Can I claim any principal that I paid or even the
> full amount up to $4000 that the Stafford loan paid? It
> sounds like it all depends on how this is reported on the
> 1098-T and I have no clue how it would be reported in this
> scenario.
>
> If I continue paying on the loan for two years after
> graduating, will there be any tax deductions in those year
> post-graduation?
>
> Scenario C
> Basically the same as Scenario B, but I pay off the at least
> $4000 towards the student loan before the end of 2007.
>
> In the end, if I can't afford it all in cash, I am wondering
> if there is any benefit to me putting it on a low interest
> credit card and trying to pay it off as fast as possible AND
> getting a tax deduction if the Stafford loan makes me
> uneligible for the tax deduction.
Your payment of tuition and fees for graduate school can
trigger a tax deduction for the tuition & fees OR a Lifetime
Learning Credit for the tuition and fees AND a deduction for
student loan interest.
If you pay qualified higher education expenses to an
eligible college, then you may avail yourself of either the
tuition deduction or the credit. Take whichever one you are
eligible for and the one that provides the greater state and
federal tax benefit. The law doesn't care where you obtained
the funds to pay the tuition. Borrowed funds are the same
as your own cash.
If you borrow the funds and also pay interest on the student
loan, you may be able to deduct up to $2500 of interest
expense.
IRS Pub 970 explains all the higher education tax benefits
and has the eligibility rules.
http://www.irs.gov/pub/irs-pdf/p970.pdf
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