Student Loans and Tuition Tax Credits/Deductions

One thing I have never understood is why some clients believe they cannot claim tuition on their tax return if they receive the funds from student loans. At the same time, they will take out a loan to buy a car and be very forthright about claiming the sales tax.

I guess it’s a misunderstanding of how things are paid.  When someone loans you money,  your obligation to repay that loan is instantaneous  regardless of the fact that you negotiate  a payment frequency and an end point  for those payments.  I guess some  would surmise that they could not  deduct the tuition immediately,  but over the life  of the loan.  If that was the case,  they would have to keep track of every principle payment they make to determine  the amount of tuition they can deduct.  That would be a huge administrative burden on the IRS to track.

With tuition,  the only time the source of funds becomes an issue is when it comes from scholarships, grants  and any other source of tax free, unearned funds.  Otherwise, whether you get the tuition money  from a loan or a gift from Aunt Sue,  it’s the payment of the tuition that triggers the  deduction.

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