Borrower Tax Incentives

Borrowing federal student loans gives you certain tax advantages. Whether you are in repayment, taking classes, or working, you may be eligible for these incentives for tax year 2009.

All of these deductions and credits have distinct eligibility requirements. Before claiming any incentives, consult a tax professional. For more information, consult IRS Publication 970.

Tax Deductions

Student Loan Interest Deduction

You may qualify for a tax deduction just by paying your student loans.

  • If you are not a dependent listed on someone else’s tax return, it is possible for you to deduct up to $2,500 of student loan interest paid a year.
  • Eligible taxpayers need to have a modified adjusted gross income (MAGI, see below for more information) less than $60,000 ($120,000 if filing jointly).
  • If your MAGI is more than $60,000 but less than $75,000 ($120,000 and $150,000 if filing jointly), you may be eligible for a smaller deduction.
  • If you make more than $75,000 ($150,000 if filing jointly), you are not eligible to deduct student loan interest.

Tuition and Fees Deduction

You may be able to deduct qualified education expenses—including tuition and fees—paid for you, your spouse, or a dependent.

  • If your MAGI is less than $65,000 ($130,000 if filing jointly), you may be able to deduct $4,000 in qualified expenses.
  • If your MAGI is more than $65,000 but less than $80,000 ($160,000 if filing jointly), you may be eligible for a $2,000 deduction.
  • If you make more than $80,000 ($160,000 if filing jointly), you are not eligible for the tuition and fees deduction.

Employer Education Assistance

Your employer may provide you with education assistance benefits for undergraduate or graduate courses tax-free each year.

  • Benefits can be up to $5,250.
  • Payments above $5,250 may also be tax-free if they represent a working condition fringe benefit.
  • Benefits must be paid toward tuition, fees, books, supplies, or equipment. 
  • If you paid for the expenses, you may be able to deduct them as an employee business expense.

Education Credits

You may be eligible for the Lifetime Learning Tax Credit, the American Opportunity Tax Credit, and the Hope Credit, but some restrictions apply.

  • You’re ineligible for these credits if you’re married and file a separate return from your spouse or if you’re listed as a dependent on another person’s tax return.
  • You cannot claim multiple credits for the same student in the same year.
  • You cannot take both an education credit and the tuition and fees deduction for the same student in the same year.

Lifetime Learning Tax Credit

You may claim a Lifetime Learning Credit for qualified education expenses each year you are in school.

  • Your credit can be up to $2,000 (or $4,000 for students in Midwestern disaster areas) if your MAGI is less than $50,000 ($100,000 if filing jointly).
  • If your MAGI is between $50,000 and $60,000 ($100,000 to $120,000 if filing jointly), you may be eligible for a partial credit.
  • Qualified expenses include money you’ve paid directly for education or from borrowed funds.
  • This tax credit reduces the amount of income tax you may have to pay, and there’s no limit on the number of years you can claim it.

American Opportunity Credit and Hope Credit

The American Opportunity Credit (a modification of the Hope Credit) benefits students who are enrolled at least half time for at least 1 academic period during the tax year. This credit is available for tax years 2009 and 2010.

  • Students must be pursuing an undergraduate degree or other recognized education credential.
  • This credit is available for the first 4 years of postsecondary education.
  • You can claim up to $2,500 if your MAGI is less than $80,000 ($160,000 if filing jointly).
  • If your income is between $80,000 and $90,000 ($160,000 and $180,000 if filing jointly), you may qualify for a credit of a lower amount.
  • If the calculated credit exceeds your tax obligation, you may receive up to 40% of the tax credit amount as a refund.

You can claim the Hope Credit only if you have at least one eligible student attending an eligible institution in a Midwestern disaster area.

  • This credit is available for the first 2 years of postsecondary education.
  • If eligible for the Hope Credit, you can claim up to $3,600 if your MAGI is less than $50,000 ($100,000 if filing jointly).

If your MAGI is between $50,000 and $60,000 ($100,000 to $120,000 if filing jointly), you may be eligible for a partial credit.

This document was prepared for informational purposes only and cannot be considered tax advice or otherwise. Please see your tax professional for additional guidance.

What Is Modified Adjusted Gross Income?

Adjusted gross income is calculated by adjusting your full (gross) income—which includes wages, alimony, Social Security, and business, investment, and dividend income—downward based on certain deductions. This amount is then modified by adding back certain items (including student loan deductions) to determine your modified adjusted gross income.