Who Claims the Deduction
A taxpayer must have a legal obligation to make the interest payments under the terms of the education loan to qualify to deduct the education interest (Reg. § 1.221-1(b)(1)). No education interest deduction is permitted to a taxpayer who is a dependent of someone else (Reg. § 1.221-1(b)(2)).
Example – Legal Obligation and Dependency: Alice pays $750 of student loan interest during the tax year. Alice is the only person obligated to make the payments. Her parents claim her as a dependent on their return. Alice isn’t able to deduct the student loan interest because she was claimed as a dependent by her parents; the parents can’t deduct the interest because they are not legally liable for the debt.
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If a third party who is not legally obligated to make an interest payment on an education loan pays the interest on behalf of the borrower who is legally obligated to make the payment, then the borrower is treated as receiving the payment from the third party and, in turn, paying the interest (Reg. § 1.221-1(b)(4)).
Example – Legal Obligation and Not a Dependent: If Alice from the prior example was not claimed as a dependent by her parents, she would be eligible to claim a deduction for the student loan interest she paid, even if the money she used to pay the debt came as a gift from her grandmother. Of course, if she had no income and wasn’t required to file, or had to file but had no tax liability, Alice wouldn’t get any benefit from the deduction.
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