Student Loan Interest

[Bjorn]

Fact Pattern:
A dependent took a student loan under her social security number. The parents claimed the interest as an adjustment to their income on the parents 1040.

Is there anyway around this? I think the IRS will win on this on. Any thoughts.

[Lance Emerson]

Not Good

No way around it I'm afraid. Reg. Section 1.221-1(b)(2)(ii) has an example.

"...Student C pays $750 of interest...Only Student C has the legal obligation to make the payments. Student C's parent claims him as a dependent...Because student C's parent was not legally obligated to make the payments, Student C's parent also is not entitled to a deduction for the interest..."

Some choices are available for other types of student expenses, but apparently not for interest.

[S T]

Student Loan Interest

Child's name on the student loan, regardless of who pays it. reporting of interest paid will be to the child. Financial obligation on the debt is the childs not the parent.

Think you are right, IRS will win!

Sandy

[Mark Goldberg]

Thought I would mention

If the child is not the parent's dependent and the parent pays the interest the child can claim it on her return. IRS put this out about 1 year ago.

[Gretel]

So, what you say

Mark, is, the child doesn't need to pay the loan, it just needs to be liable for it? I thought the child would also need to pay.

[Bees Knees]

If the child is not the parent's dependent and the parent pays the interest the child can claim it on her return. IRS put this out about 1 year ago.

The ruling is actually part of the regulations. Reg. Section 1.221-2(b)(4)(ii), Example 2 is as follows:


EXAMPLE 2. Payment by parent. Student D obtains a qualified education loan to attend college. Upon graduation from college, Student D makes legally required monthly payments of principal and interest. Student D's mother makes a required monthly payment of interest as a gift to Student D. A deduction for Student D as a dependent is not allowed on another taxpayer's tax return for that taxable year. Assuming fulfillment of all other requirements of section 221, Student D may deduct this payment of interest for Federal income tax purposes.

[Bees Knees]

Mark, is, the child doesn't need to pay the loan, it just needs to be liable for it? I thought the child would also need to pay.

In the above example, the student is considered to have made the payment because when a third party pays it for the student, it is considered a gift to the student, who then turns around and uses it to pay the interest.

This only works if the student is not a dependent. If the student is a dependent, then the third party payment is not considered a gift, but rather, support.