2002 Tax Help Archives  

Publication 970 2002 Tax Year

Tax Benefits for Education

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This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

How Is the Deduction Figured?

Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 3-1 on the next page.

How Is the Deduction Claimed?

The student loan interest deduction is an adjustment to income. To claim the deduction, enter the allowable amount on line 25 of Form 1040, or line 18 of Form 1040A.

Canceled Student Loan

Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes. However, if your student loan is canceled, you may not have to include any amount in income. This section describes the requirements for tax-free treatment of canceled student loans.

Which Loans Qualify?

To qualify for tax-free treatment, your loan must contain a provision that all or part of the debt will be canceled if you work:

  • For a certain period of time,
  • In certain professions, and
  • For any of a broad class of employers.

The loan must have been made by a qualified lender to assist the borrower in attending an educational institution.

Qualified lenders.   These include the following.

  1. The government - federal, state, or local, or an instrumentality, agency, or subdivision thereof.
  2. A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital and whose employees are considered public employees under state law.
  3. An educational institution if the loan is made:
    1. As part of an agreement with an entity described in (1) or (2) under which the funds to make the loan were provided to the educational institution, or
    2. Under a program of the educational institution that is designed to encourage students to serve in occupations or areas with unmet needs, and where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

CAUTION: In satisfying the service requirement in (3)(b), the student must not provide services for the lender organization.
 

Refinanced loan.   If you refinanced a student loan with another loan from an educational institution or a tax-exempt organization, that loan can also be considered as made by a qualified lender.

It is considered made by a qualified lender if it was made under a program of the institution or organization designed to encourage students to serve in occupations or areas with unmet needs, and where the services required of the students are for or are under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. You must complete Form 1040, lines 7 through 24 and lines 27 through 33a, plus any amount to be entered on the dotted line next to line 34, before using this worksheet.

Worksheet 3-1.  Student Loan Interest Deduction Worksheet    (Keep for Your Records)
 1. Enter the total interest you paid in 2002 on qualified student loans. Do not enter more than $2,500 1.       
 2. Enter your total income from Form 1040, line 22       2.              
 3. Enter the total of amounts from Form 1040, lines 23 and 24 3.                  
 4. Enter the total of amounts from Form 1040, lines 27 through 33a, plus any amount you entered on the dotted line next to line 34 4.                  
 5. Add the amounts on lines 3 and 4       5.              
 6. Subtract the amount on line 5 from the amount on line 2       6.              
 7. Enter any foreign earned income exclusion and/or housing exclusion (Form 2555, line 43, or Form 2555-EZ, line 18)       7.              
 8. Enter any housing deduction (Form 2555, line 48)       8.              
 9. Enter the amount of income from Puerto Rico that you are excluding       9.              
10. Enter the amount of income from American Samoa that you are excluding (Form 4563, line 15)       10.              
11. Add the amounts on lines 6 through 10. This is your modified adjusted gross income 11.       
12. Enter the amount shown below for your filing status 12.       
     · Single, head of household, or qualifying widow(er) - $50,000       
     · Married filing jointly - $100,000       
13. Is the amount on line 11 more than the amount on line 12?       
      [ ] No. Skip line 14, enter -0- on line 15, and go to line 16.       
      [ ] Yes. Subtract line 12 from line 11 13.       
14. Divide line 13 by $15,000 ($30,000 if married filing jointly). Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 14. .   
15. Multiply line 1 by line 14 15.       
16. Student loan interest deduction. Subtract line 15 from line 1. Enter the result here and on Form 1040, line 25. Do not include this amount in figuring any other deduction on your return (such as on Schedule A, C, E, etc.) 16.       

Section 501(c)(3) organization.   This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.

  • Charitable.
  • Religious.
  • Educational.
  • Scientific.
  • Literary.

  • Testing for public safety.
  • Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).
  • The prevention of cruelty to children or animals.

Educational institution.   This is an organization with a regular faculty and curriculum and a regularly enrolled body of students in attendance at the place where the educational activities are carried on.

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