Question

In 2015 Chara incurred a loan to pay for qualified higher education expenses for her 20-year-old granddaughter, who was a dependent. In 2019 her granddaughter graduated from college, moved away to start a new job, and ceased to be a dependent on Chara’s tax return. Chara started making payments on the loan in 2019. Without regard to any modified AGI limitations, is Chara permitted to deduct interest on the loan?

Answer 1

Qualified educational expenses are the costs of attendance at an eligible educational institution. These expenses include tuition ,fees, books, supplies, room, board and other necessary expenses of attendance. The expenses must be reduced by certain non taxable income related to education.

Modified AGI =  AGI on the taxpayer's return + Any deduction for student loan interest + Any foreign, U.S. possession, or Puerto Rican income excluded from taxable income.

Yes, Chara is permitted to deduct interest on loan as the higher education loans must be for education expenses of the taxpayer or dependent. The dependent limitation is applicable when the loan is incurred, not repaid. Deductible interest is limited to $2500 per year