Student loan interest deduction - different scenario

[oceanlovin'ea]

New client that moved here from another state. On last years return there was student loan interest for their son who is no longer their dependent. Since my understanding was that as long as the student was dependent on return, the deduction could be claimed. But if not, no deduction.

After reading other thread, I guess I should ask them who is responsible for the loan. If they are, then they can deduct it. If not, they can't.

Am I correct in my thinking with all of this?

Linda, EA

[Kram BergGold]

Yes

The person whose name is on the loan deducts the interest.

[New York Enrolled Agent]

New client that moved here from another state. On last years return there was student loan interest for their son who is no longer their dependent. Since my understanding was that as long as the student was dependent on return, the deduction could be claimed. But if not, no deduction.

A snip from IRC §221

(1) Qualified education loan
The term "qualified education loan" means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses--

(A) which are incurred on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

[buzzardbreath]

Let me make sure

Let me make sure I have this correct. Sometimes the tax laws are far more generous than I would be if I wuz king.

Momma signs a $75,000 loan for Johnny to go to college. Terms are as long as he is undergraduate for four years, loan does not have to be paid back, so no payment. Johnny goes to school to age 23, the last year he is able to be taken as a dependent.

Johnny's degree is in socio-psycho-religio-greenery. Upon graduation, he takes a job with some PeaceCorps-like agency, and goes to the far corners of the earth, bringing education, healthcare, sanitation, and civility to some of the most heathern and despondent societies on the planet. Johnny works for this agency for 15 years. Further terms of the loan state that if Johnny goes to work for a benevolent agency, payment on the principal is postponed.

Finally Johnny, now 38 years old, leaves his employment and decides to find a "real" job. With the high cost of living in the USA, he rapidly becomes just as despondent as those teeming populations he was teaching to avoid such a fate. The student loan is now due, in fact, jumping up and down to be paid back the $75,000 plus interest.

So Momma now begins payment on this loan for her 38-year son, who by now can by no means be claimed as a dependent child. In the first year, $2150 in interest is paid by Momma.

So we are now finding out (since Johnny was a dependent at the time of the loan) Momma can deduct the interest???

...just wanted to make sure I understood this correctly. Thanks, bb

"Every Momma thinks her crow is the blackest" - old Tennessee proverb

[New York Enrolled Agent]

Momma signs a $75,000 loan for Johnny to go to college. Terms are as long as he is undergraduate for four years, loan does not have to be paid back, so no payment. Johnny goes to school to age 23, the last year he is able to be taken as a dependent.

So Momma now begins payment on this loan for her 38-year son, who by now can by no means be claimed as a dependent child. In the first year, $2150 in interest is paid by Momma.

So we are now finding out (since Johnny was a dependent at the time of the loan) Momma can deduct the interest???

Unless I'm missing something, I don't see why not.

Son was a dependent at the time of the loan. Just make sure that the loan is in mom's name. The regulations for §221 are quite specific.

(b) Eligibility.

(1) Taxpayer must have a legal obligation to make interest payments.
A taxpayer is entitled to a deduction under section 221 only if the taxpayer has a legal obligation to make interest payments under the terms of the qualified education loan.

The IRS does do correspondence audits on this when the SS number of the child is used on 1099 forms and the parent is paying the loan and taking the interest deduction.

[David1980]

Momma signs a $75,000 loan for Johnny to go to college.

In the first year, $2150 in interest is paid by Momma.

Momma should be fine. Note that this would go differently if Johnny is the only one responsible for paying the loan - a more common situation I would think. Given the number of highly paid recent college graduates I would guess we'll see a lot of parents paying on their kids student loans. Just need to make sure the parent actually has a legal obligation to make those payments.

[oceanlovin'ea]

BUT if Johnny got the loan and when school was finished, parents agreed to make the payments on the loan for him, then they are not the ones legally responsible. Just being very nice to son.

Actually if they gave the money to the son and he made the payments, he could deduct it.

Is that right?

Linda, EA

[ATSMAN]

Or even if parents paid the loan but the loan was in the child's name, the child could deduct it on their own return. The payment by the parents would be considered a gift to the child.