Student Loan Interest Deduction

[Crank]

I have a client who cosigned for private student loans for his son.  The total student loan interest paid for the year will be about $10,000.  The son is not a dependent of the father.  Since both names are on the loans and both are legally obligated to repay the loans can they both take the $2500 interest deduction.  Cant find any appropriate guidance on this.  Comments are appreciated.

[RitaB]

2 hours ago, Crank said:

I have a client who cosigned for private student loans for his son.  The total student loan interest paid for the year will be about $10,000.  The son is not a dependent of the father.  Since both names are on the loans and both are legally obligated to repay the loans can they both take the $2500 interest deduction.  Cant find any appropriate guidance on this.  Comments are appreciated.

You may be on to something, but to claim the interest, the party would have to actually pay the interest.  Did both parties pay interest?  (Forgive me if I am asking too basic a question there.)

From:  https://www.irs.gov/taxtopics/tc456.html

You can claim the deduction if all of the following apply:

• You paid interest on a qualified student loan in tax year xxxx
• You are legally obligated to pay interest on a qualified student loan
• Your filing status is not married filing separately
• Your MAGI is less than a specified amount which is set annually, and
• You or your spouse, if filing jointly, cannot be claimed as dependents on someone else's return

 

[jklcpa]

2 hours ago, Crank said:

The son is not a dependent of the father.

Sec 221(d)(1)(A) covers this part of your question. As long as the son was a dependent at the time the loan was taken out, the father could take the deduction as long as all the other rules are met, including that the son isn't claimed as a dependent now by someone else.

 

[jklcpa]

Rita, I don't think that is correct about the who makes the payment. I'd have to look for an official cite, but pub 970 has this:

Interest paid by others.   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest.

[RitaB]

6 minutes ago, jklcpa said:

Rita, I don't think that is correct about the who makes the payment. I'd have to look for an official cite, but pub 970 has this:

Interest paid by others.   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest.

Oh, I may be taking that too literally.  (You paid interest on a qualified student loan in tax year xxxx).   Gotcha.

Yes, it's on page 33 of Publication 970.

[jklcpa]

Crank, like you, I can't find anything that says they both can't take the deduction.

[RitaB]

OK, check this out.  I am thinking (for this purpose), a payment made by one legally obligated person can't be considered a payment made on behalf of another legally obligated person. (So if son made all payments, dad can't get credit for any payments, and vice/versa.)

https://www.law.cornell.edu/cfr/text/26/1.221-1

(4) Payments of interest by a third party -

(i) In general. If a third party who is not legally obligated to make a payment of interest on a qualified education loan makes a payment of interest on behalf of a taxpayer who is legally obligated to make the payment, then the taxpayer is treated as receiving the payment from the third party and, in turn, paying the interest.

[Pacun]

So, if father paid 45% and uncle paid 55%, student paid 0, they both can claim $2,500 as long as they are dependent since they both are obligated to the loan?

 

[Crank]

Son was a dependent when the loans were taken out.  Since the father is a co-signer he is legally obligated to repay the loans, along with the son.  The father claims he has paid on the loans but not directly.  He gave money to his son who has the payments taken out by direct debit to his checking account.

[Pacun]

Only the child can take the $2500 in your case.

If I were the father, I would be paying December from my account directly to the lender.

[Jack from Ohio]

Whose name and SS# are on the 1098-E?  This is the person that can claim the deduction.  

[Pacun]

You still need proof of payment. 1098s are for info only

[Jack from Ohio]

11 minutes ago, Pacun said:

You still need proof of payment. 1098s are for info only

1098-E shows the amount of interest PAID on the student loan.

[Crank]

1098 is in the students name and SS.  Im leaning toward both getting the deduction but still have time to research this.  Its complicated.  Of course the student qualifies for the deduction but Im not convinced that the father (co-signer) is unable to also take it.

[SaraEA]

Why is this so complicated?  The father did NOT pay the loan but instead gave the cash to the son, who did pay the loan.   Son gets to deduct the interest.  Now, since they are both legally obligated, and if the interest is say $5k, I don't see a problem with Dad making half the payments and son making the other half (with Dad's money).  In that case, they could both deduct $2500.  That might be a tactic for next year.

I have always had a complaint about the limits on the student loan interest deduction.  For single filers it starts to phase out at $65k AGI, double that for MFJ.  These are the people who make too much to get grants so rely on loans.  Make less and you can get Pell grants; make more and you can presumably afford the cost of college.  But make $65k and you can't get grants and can't deduct all your loan interest either.  Just another one of those items congress passed to make it look like they were helping voters out with college costs but wrote rules denying those people the benefits.  (Exactly like the credit for the elderly--how many of those has anyone actually done?)  And don't get me started about why it seems no one actually saves for their kids' education.  The student loan situation is crippling our young, they can't move out of Mom's basement or start a family, total student loan debt is larger than credit card debt, blah blah.  Easier to complain about the high cost of education and loans than to put away even a modest amount every month when children are young to ease the burden when the time comes.

[jklcpa]

4 minutes ago, SaraEA said:

Why is this so complicated? 

Gee, could it be because we didn't have that information until later in the discussion?

[RitaB]

11 hours ago, jklcpa said:

Gee, could it be because we didn't have that information until later in the discussion?

Also be less complicated if somebody hadn't made that seventh post.  Grrrrrr.  LOL.

 

[Crank]

The lender will only issue the 1098E in the name of the son (primary borrower).  So even if the father were to make payments directly he would not receive a 1098E.  That settles it for me.  Only the son will claim the deduction.  Thank you all for the replies!

[Jack from Ohio]

9 hours ago, Crank said:

The lender will only issue the 1098E in the name of the son (primary borrower).  So even if the father were to make payments directly he would not receive a 1098E.  That settles it for me.  Only the son will claim the deduction.  Thank you all for the replies!

You are absolutely correct.  Only the person contractually liable can deduct the interest.  Co-signing is NOT the same as being contractually liable.  Follow the 1098-E.

[Burke]

On ‎12‎/‎1‎/‎2016 at 2:26 AM, Jack from Ohio said:

  Co-signing is NOT the same as being contractually liable.  Follow the 1098-E.

Beg to differ.  Co-signer IS contractually liable for payment on any loan for as long as it is outstanding and payment is not made by the original party.   (Mtge interest 1098's often only have one name and SSN on them, even though husband and wife are parties to the loan and contractually liable to pay.)

[Jack from Ohio]

4 hours ago, Burke said:

Beg to differ.  Co-signer IS contractually liable for payment on any loan for as long as it is outstanding and payment is not made by the original party.   (Mtge interest 1098's often only have one name and SSN on them, even though husband and wife are parties to the loan and contractually liable to pay.)

Only if the original party defaults.  That creates an entirely different situation.  This is not the situation the OP was describing.