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.
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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.
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.
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.
You need to meet all these conditions to use the student loan interest deduction:
*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.
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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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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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.