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If you file taxes in the US, you may be able to deduct student loan interest from your taxable income. But what if the interest payments are made on a student loan from a non-US bank?
The quick answer is yes, you might be eligible for the student loan interest deduction. However, you’ll still need to meet other requirements for the interest payments to be deductible.
What is a student loan interest deduction?
Student loan interest deduction refers to the amount you can deduct from your taxable income return for interest payments made on a qualified student loan. This includes interest payments you may have made voluntarily, such as extra payments and any payments that were required. This deductible amount is the lesser value between the actual interests paid during the year or $2,500. In other words, the maximum deduction is $2500. In order to get the deduction, you actually have to pay the interest, not just accrue it.
Why is this deduction beneficial?
For a given year, you can reduce your taxable income by as much as $2,500 by claiming the student loan interest deduction. Aside from simple interest on the loan, capitalized interest and interest on refinanced and consolidated student loans may qualify.
Do I need to itemize my expenses in order to claim this deduction?
No. Student loan deduction is an above-the-line deduction. Whether you are itemizing or applying the standard deduction you can claim the student loan interest as a deduction.
Deductible student loan interest reduces your adjusted gross income. It is not treated as an expense item in your tax return.
You can claim this deduction on Line 33 of your Form 1040NR or Form 1040. If you’re using form 1040EZ or Form 1040NR-EZ, this deduction is not available.
What are the rules and who qualifies for the deduction?
You need to meet all these conditions to use the student loan interest deduction:
- You paid interests on a qualified student loan* during the year
- Your status is not married filing separately
- You have a modified adjusted gross income (MAGI) of less than $80,000 if you are single or head of household and $165,000 if you are married filing jointly
- If your status is married filing jointly, you or your spouse must not be someone else’s dependent
- If your spouse is under an F, J, M or Q visa, he or she is a non-resident alien for tax purposes and you have the option to file taxes under a Married Filing Separately status. If you do so, you won’t be able to claim the deduction unless your spouse elects to be a tax resident and your status is married filing jointly
*A qualified student loan refers to any loan you took out to pay for qualified higher education expenses for you, your spouse or your dependent under most circumstances.
IRS Publication 970 provides more guidance on the items related to student loan interest deduction.
Does student loan interest paid to a foreign bank qualify?
As long as you meet the requirements set out above, the interest will qualify as a deduction. It doesn’t matter whether you took out a loan from a US bank or a foreign bank.
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How should a person deduct student loan interest on their taxes? What form(s) or fields do they need?
You can claim the student loan interest deduction in Schedule 1, Line 33 of Form 1040.
You should receive Form 1098-E from your lender if you paid more than $600 for interest on a qualified student loan but you can still deduct it even if you paid less than that.
Form 1098-E is a US form. So, you will not receive this form from a foreign lender but you can still claim the deduction on your tax return.
For interest paid to a foreign lender, the deduction is the amount of interest paid for the qualified student loan. If the IRS requests for details about the deduction, documents indicating that the loan is a qualified student loan and statements from your lender showing the amount of interest paid will suffice.
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Taking Advantage of Legitimate Deductions Can Reduce Your Taxable Income
Even if you’re paying in the taxes, some payments to foreign institutions like student loan interest can be deducted to your income. For further guidance on student loans interest deduction and other expenses that can reduce your tax liability, consult an expert.