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Hrblock com Publication 3402 - Main Content Table of Contents What is a Limited Liability Company? Classification of an LLC LLCs Classified as Partnerships LLCs Classified as Disregarded Entities LLCs Classified as Corporations Subsequent Elections How To Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What is a Limited Liability Company? For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. Hrblock com Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Hrblock com An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301. Hrblock com 7701-3. Hrblock com The information in this publication applies to LLCs in general, and different rules may apply to special situations, including banks, insurance companies, or nonprofit organizations that are LLCs or that own LLCs. Hrblock com Check your state's requirements and the federal tax regulations for further information. Hrblock com Classification of an LLC Default classification rules. Hrblock com   An LLC with at least two members is classified as a partnership for federal income tax purposes. Hrblock com An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). Hrblock com Also, an LLC's federal tax classification can subsequently change under certain default rules discussed later. Hrblock com Elected classification. Hrblock com   If an LLC does not choose to be classified under the above default classifications, it can elect to be classified as an association taxable as a corporation or as an S corporation. Hrblock com After an LLC has determined its federal tax classification, it can later elect to change that classification. Hrblock com For details, see Subsequent Elections, later. Hrblock com LLCs Classified as Partnerships If an LLC has at least two members and is classified as a partnership, it generally must file Form 1065, U. Hrblock com S. Hrblock com Return of Partnership Income. Hrblock com Generally, an LLC classified as a partnership is subject to the same filing and reporting requirements as partnerships. Hrblock com For certain purposes, members of an LLC are treated as limited partners in a limited partnership. Hrblock com For example, LLC members are treated as limited partners for purposes of material participation under the passive activity limitation rules (see Temporary Regulation section 1. Hrblock com 469-5T(e)). Hrblock com See the Instructions for Form 1065 for reporting rules that apply specifically to LLCs. Hrblock com Member manager. Hrblock com   Only a member manager of an LLC can sign the partnership tax return. Hrblock com And only a member manager can represent the LLC as the tax matters partner under the consolidated audit proceedings in sections 6221 through 6234. Hrblock com A member manager is any owner of an interest in the LLC who, alone or together with others, has the continuing authority to make the management decisions necessary to conduct the business for which the LLC was formed. Hrblock com If there are no elected or designated member managers, each owner is treated as a member manager. Hrblock com Change in default classification. Hrblock com   If the number of members in an LLC classified as a partnership is reduced to only one member, it becomes an entity disregarded as separate from its owner under Regulations section 301. Hrblock com 7701-3(f)(2). Hrblock com However, if the LLC has made an election to be classified as a corporation (discussed later) and that elective classification is in effect at the time of the change in membership, the default classification as a disregarded entity will not apply. Hrblock com   Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of. Hrblock com If a partnership that becomes a disregarded entity as a result of a decrease in the number of members makes an election to be classified as a corporation, the applicable deemed transactions discussed under Subsequent Elections, later, apply. Hrblock com Example 1. Hrblock com Ethel and Francis are members of an LLC classified as a partnership for federal tax purposes. Hrblock com Each holds an equal membership interest. Hrblock com The LLC does not hold any unrealized receivables or substantially appreciated inventory. Hrblock com Ethel sells her entire interest in the LLC to Francis for $10,000. Hrblock com After the sale, the business is continued by the LLC, which is owned solely by Francis. Hrblock com No entity classification election is made after the sale to treat the LLC as a corporation for federal tax purposes. Hrblock com The partnership terminates when Francis buys Ethel's entire interest. Hrblock com Ethel must treat the transaction as the sale of a partnership interest and must report gain or loss, if any, resulting from the sale of her partnership interest. Hrblock com For purposes of determining the tax treatment of Francis, the partnership is deemed to make a liquidating distribution of all of its assets to Ethel and Francis, and after this distribution, Francis is treated as acquiring the assets deemed to have been distributed to Ethel in liquidation of Ethel's partnership interest. Hrblock com Francis's basis in the assets attributable to Ethel's one-half interest in the partnership is $10,000, the purchase price for Ethel's partnership interest. Hrblock com Upon the termination of the partnership, Francis is considered to receive a distribution of those assets attributable to Francis's former interest in the partnership. Hrblock com Francis must recognize gain or loss, if any, on the deemed distribution of the assets to the extent required by Internal Revenue Code section 731(a). Hrblock com See Partnership Distributions in Publication 541. Hrblock com Example 2. Hrblock com George and Henrietta are members of an LLC classified as a partnership for federal tax purposes. Hrblock com Each holds an equal membership interest. Hrblock com The LLC does not hold any unrealized receivables or substantially appreciated inventory. Hrblock com George and Henrietta each sell their entire interests in the LLC to Ian, an unrelated person, in exchange for $10,000. Hrblock com After the sale, the business is continued by the LLC, which is owned solely by Ian. Hrblock com No entity classification election is made after the sale to treat the LLC as a corporation for federal tax purposes. Hrblock com The partnership terminates when Ian purchases the entire interests of George and Henrietta in the LLC. Hrblock com George and Henrietta must report gain or loss, if any, resulting from the sale of their partnership interests. Hrblock com For purposes of classifying the acquisition by Ian, the partnership is deemed to make a liquidating distribution of its assets to George and Henrietta. Hrblock com Immediately following this distribution, Ian is deemed to acquire, by purchase, all of the former partnership's assets. Hrblock com   For more details on the preceding two examples, see Revenue Ruling 99-6, 1999-6 I. Hrblock com R. Hrblock com B. Hrblock com 6. Hrblock com You can find Revenue Ruling 99-6 at www. Hrblock com irs. Hrblock com gov/pub/irs-irbs/irb99-06. Hrblock com pdf. Hrblock com LLCs Classified as Disregarded Entities If an LLC has only one member and is classified as an entity disregarded as separate from its owner, its income, deductions, gains, losses, and credits are reported on the owner's income tax return. Hrblock com For example, if the owner of the LLC is an individual, the LLC's income and expenses would be reported on the following schedules filed with the owner's Form 1040: Schedule C, Profit or Loss from Business (Sole Proprietorship); Schedule C-EZ, Net Profit From Business (Sole Proprietorship); Schedule E, Supplemental Income and Loss; or Schedule F, Profit or Loss From Farming. Hrblock com Employment tax and certain excise taxes. Hrblock com   A single-member LLC that is classified as a disregarded entity for income tax purposes is treated as a separate entity for purposes of employment tax and certain excise taxes. Hrblock com For wages paid after January 1, 2009, the single-member LLC is required to use its name and employer identification number (EIN) for reporting and payment of employment taxes. Hrblock com A single-member LLC is also required to use its name and EIN to register for excise tax activities on Form 637; pay and report excise taxes reported on Forms 720, 730, 2290, and 11-C; and claim any refunds, credits, and payments on Form 8849. Hrblock com See the employment and excise tax returns for more information. Hrblock com Self-employment tax rule for disregarded entity LLCs. Hrblock com   An individual owner of a single-member LLC classified as a disregarded entity is not an employee of the LLC. Hrblock com Instead, the owner is subject to tax on the net earnings from self-employment of the LLC which is treated in the same manner as a sole-proprietorship. Hrblock com Example 3. Hrblock com LLC is a disregarded entity owned by Irene. Hrblock com LLC has three employees (Kent, Patricia, and Tex) and pays wages. Hrblock com LLC is treated as an entity separate from its owner for purposes of employment taxes. Hrblock com For the wages paid to Kent, Patricia, and Tex, LLC is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes. Hrblock com In addition, LLC must file under its name and EIN the applicable employment tax returns; make timely employment tax deposits; and file with the Social Security Administration and furnish to LLC's employees (Kent, Patricia, and Tex) Forms W-2, Wage and Tax Statement. Hrblock com Irene is self-employed for purposes of the self-employment tax. Hrblock com Thus, Irene is subject to self-employment tax on her net earnings from self-employment with respect to LLC's activities. Hrblock com Irene is not an employee of LLC for purposes of employment taxes. Hrblock com Because LLC is treated as a sole proprietorship of Irene for income tax purposes, Irene must report the income and expenses from LLC on her Schedule C. Hrblock com Irene will figure the tax due on her net earnings from self-employment on Schedule SE. Hrblock com Irene can also deduct one-half of her self-employment tax on line 27 of her Form 1040. Hrblock com Taxpayer identification number. Hrblock com   For all income tax purposes, a single-member LLC classified as a disregarded entity must use the owner's social security number (SSN) or EIN. Hrblock com This includes all information returns and reporting related to income tax. Hrblock com For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number and Certification, the LLC must provide the owner's SSN or EIN, not the LLC's EIN. Hrblock com   However, most new single-member LLCs classified as a disregarded entity will need to obtain an EIN for the LLC. Hrblock com An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed above (see Employment tax and certain excise taxes earlier). Hrblock com See Form SS-4, Application for Employer Identification Number, for information on applying for an EIN. Hrblock com Change in default classification. Hrblock com   If a single-member LLC classified as a disregarded entity for income tax purposes acquires an additional member, it becomes a partnership under Regulations section 301. Hrblock com 7701-3(f)(2). Hrblock com However, if the LLC has made an election to be classified as a corporation (discussed later) and that elective classification is in effect at the time of the change in membership, the default classification as a partnership will not apply. Hrblock com   Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of. Hrblock com If a disregarded entity that becomes a partnership as a result of an increase in the number of members makes an election to be classified as a corporation, the applicable deemed transactions discussed in Subsequent Elections, later, apply. Hrblock com Example 4. Hrblock com Bart, who is not related to Alain, buys 50% of Alain's interest in an LLC that is a disregarded entity for $5,000. Hrblock com Alain does not contribute any portion of the $5,000 to the LLC. Hrblock com Alain and Bart continue to operate the business of the LLC as co-owners of the LLC. Hrblock com The LLC is converted to a partnership when the new member, Bart, buys an interest in the disregarded entity from the owner, Alain. Hrblock com Bart's buying a 50% interest in Alain's ownership interest in the LLC is treated as Bart's buying a 50% interest in each of the LLC's assets, which are treated as owned directly by Alain for federal income tax purposes. Hrblock com Immediately thereafter, Alain and Bart are treated as contributing their respective interests in those assets to a partnership in exchange for ownership interests in the partnership. Hrblock com Alain recognizes gain or loss from the deemed sale to Bart of the 50% interest in the assets. Hrblock com Neither Alain nor Bart recognizes any gain or loss as a result of the deemed contribution of the assets to the partnership. Hrblock com Example 5. Hrblock com Charles, who is not related to Danielle, contributes $10,000 to an LLC owned by Danielle for a 50% ownership interest in the LLC. Hrblock com The LLC uses all of the contributed cash in its business. Hrblock com Charles and Danielle continue to operate the business of the LLC as co-owners of the LLC. Hrblock com The LLC is converted from a disregarded entity to a partnership when Charles contributes cash to the LLC. Hrblock com Charles's contribution is treated as a contribution to a partnership in exchange for an ownership interest in the partnership. Hrblock com Danielle is treated as contributing all of the assets of the LLC to the partnership in exchange for a partnership interest. Hrblock com Neither Charles nor Danielle recognizes gain or loss as a result of the conversion of the disregarded entity to a partnership. Hrblock com   For more details on the preceding two examples, see Revenue Ruling 99-5, 1999-6 I. Hrblock com R. Hrblock com B. Hrblock com 8. Hrblock com You can find Revenue Ruling 99-5 at www. Hrblock com irs. Hrblock com gov/pub/irs-irbs/irb99-06. Hrblock com pdf. Hrblock com LLCs Classified as Corporations An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules discussed earlier. Hrblock com File Form 8832, Entity Classification Election, to elect classification as a C corporation. Hrblock com File Form 2553, Election by a Small Business Corporation, to elect classification as an S corporation. Hrblock com LLCs electing classification as an S corporation are not required to file Form 8832 to elect classification as a corporation before filing Form 2553. Hrblock com By filing Form 2553, an LLC is deemed to have elected classification as a corporation in addition to the S corporation classification. Hrblock com If the LLC elects to be classified as a corporation by filing Form 8832, a copy of the LLC's Form 8832 must be attached to the federal income tax return of each direct and indirect owner of the LLC for the tax year of the owner that includes the date on which the election took effect. Hrblock com Example 6. Hrblock com Classification as a corporation without an S election. Hrblock com Wanda and Sylvester are members of an LLC. Hrblock com They agree that the LLC should be classified as a corporation but do not want to elect to have the LLC be treated as an S corporation. Hrblock com The LLC must file Form 8832. Hrblock com Example 7. Hrblock com Classification as a corporation with an S election. Hrblock com Evelyn and Carol are members of an LLC. Hrblock com They agree that the LLC should be classified as an S corporation. Hrblock com The LLC must file Form 2553 instead of Form 8832. Hrblock com If the LLC is classified as a corporation, it must file a corporation income tax return. Hrblock com If it is a C corporation, it is taxed on its taxable income and distributions to the members are includible in the members' gross income to the extent of the corporation's earnings and profits (double taxation). Hrblock com If it is an S corporation, the corporation is generally not subject to any income tax and the income, deductions, gains, losses, and credits of the corporation “pass through” to the members. Hrblock com Corporations generally file either: Form 1120, U. Hrblock com S. Hrblock com Corporation Income Tax Return; or Form 1120S, U. Hrblock com S. Hrblock com Income Tax Return for an S Corporation. Hrblock com For more information on the income taxation of corporations and their shareholders, see Publication 542, Corporations. Hrblock com For more information on the income taxation of S corporations and their shareholders, see the Instructions for Form 1120S, U. Hrblock com S. Hrblock com Income Tax Return for an S Corporation. Hrblock com Subsequent Elections An LLC can elect to change its classification. Hrblock com Generally, once an LLC has elected to change its classification, it cannot elect again to change it classification during the 60 months after the effective date of the election. Hrblock com An election by a newly formed LLC that is effective on the date of formation is not considered a change for purposes of this limitation. Hrblock com For more information and exceptions, see Regulations section 301. Hrblock com 7701-3(c) and the Form 8832 instructions. Hrblock com An election to change classification can have significant tax consequences based on the following transactions that are deemed to occur as a result of the election. Hrblock com Partnership to corporation. Hrblock com   An election to change classification from a partnership to a corporation will be treated as if the partnership contributed all of its assets and liabilities to the corporation in exchange for stock and the partnership then immediately liquidated by distributing the stock to its partners. Hrblock com   For more information, see Partnership Distributions in Publication 541 and Property Exchanged for Stock in Publication 542. Hrblock com Corporation to partnership. Hrblock com   An election to change classification from a corporation to a partnership will be treated as if the corporation distributed all of its assets and liabilities to its shareholders in liquidation and the shareholders then immediately contributed all of the distributed assets and liabilities to a new partnership. Hrblock com   For more information, see Contribution of Property in Publication 541 and Distributions to Shareholders in Publication 542. Hrblock com Corporation to disregarded entity. Hrblock com   An election to change classification from a corporation to a disregarded entity will be treated as if the corporation distributed all of its assets and liabilities to its single owner in liquidation. Hrblock com   For more information, see Distributions to Shareholders in Publication 542. Hrblock com Disregarded entity to corporation. Hrblock com   An election to change classification from a disregarded entity to a corporation will be treated as if the owner of the disregarded entity contributed all of the assets and liabilities to the corporation in exchange for stock. Hrblock com   For more information, see Property Exchanged for Stock in Publication 542. Hrblock com How To Get More Information This section describes the help the IRS and other federal agencies offer to taxpayers who operate their own businesses. Hrblock com Internal Revenue Service You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. Hrblock com By selecting the method that is best for you, you will have quick and easy access to tax help. Hrblock com Contacting your Taxpayer Advocate. Hrblock com   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. Hrblock com   You can contact the TAS by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TDD 1-800-829-4059 to see if you are eligible for assistance. Hrblock com You can also call or write to your local taxpayer advocate, whose phone number and address are listed in your local telephone directory and in Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS. Hrblock com You can file Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or ask an IRS employee to complete it on your behalf. Hrblock com For more information, go to www. Hrblock com irs. Hrblock com gov/advocate. Hrblock com Low Income Taxpayer Clinics (LITCs). Hrblock com   LITCs are independent organizations that provide low income taxpayers with representation in federal tax controversies with the IRS for free or for a nominal charge. Hrblock com The clinics also provide tax education and outreach for taxpayers with limited English proficiency or who speak English as a second language. Hrblock com Publication 4134, Low Income Taxpayer Clinic List, provides information on clinics in your area. Hrblock com It is available at www. Hrblock com irs. Hrblock com gov or at your local IRS office. Hrblock com Small business workshops. Hrblock com   Small business workshops are designed to help the small business owner understand and fulfill their federal tax responsibilities. Hrblock com Workshops are sponsored and presented by IRS partners who are federal tax specialists. Hrblock com Workshop topics vary from a general overview of taxes to more specific topics such as recordkeeping and retirement plans. Hrblock com Although most are free, some workshops have fees associated with them. Hrblock com Any fees charged for a workshop are paid to the sponsoring organization, not the IRS. Hrblock com   For more information, visit www. Hrblock com irs. Hrblock com gov/businesses/small. Hrblock com Subscribe to e-news for small businesses. Hrblock com   Join the e-News for Small Businesses mailing list to receive updates, reminders, and other information useful to small business owners and self employed individuals. Hrblock com Visit the website at www. Hrblock com irs. Hrblock com gov/businesses/small and click on “Subscribe to e-News. Hrblock com ” Free tax services. Hrblock com   To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. Hrblock com It contains a list of free tax publications and describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics. Hrblock com   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. Hrblock com Internet. Hrblock com You can access the IRS website at www. Hrblock com irs. Hrblock com gov 24 hours a day, 7 days a week, to: E-file your return. Hrblock com Find out about commercial tax preparation and e-file services available free to eligible taxpayers. Hrblock com Check the status of your refund. Hrblock com Go to www. Hrblock com irs. Hrblock com gov and click on Where's My Refund. Hrblock com Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Hrblock com If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Hrblock com Have your tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Hrblock com Download forms, instructions, and publications. Hrblock com Order IRS products online. Hrblock com Research your tax questions online. Hrblock com Search publications online by topic or keyword. Hrblock com View Internal Revenue Bulletins (IRBs) published in the last few years. Hrblock com Figure your withholding allowances using the withholding calculator online at www. Hrblock com irs. Hrblock com gov/individuals. Hrblock com Determine if Form 6251 must be filed using our Alternative Minimum Tax (AMT) Assistant. Hrblock com Sign up to receive local and national tax news by email. Hrblock com Get information on starting and operating a small business. Hrblock com Phone. Hrblock com Many services are available by phone. Hrblock com Ordering forms, instructions, and publications. Hrblock com Call 1-800-829-3676 to order current-year forms, instructions, and publications, and prior-year forms and instructions. Hrblock com You should receive your order within 10 days. Hrblock com Asking tax questions. Hrblock com Call the IRS with your tax questions at 1-800-829-1040. Hrblock com Solving problems. Hrblock com You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. Hrblock com An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Hrblock com Call your local Taxpayer Assistance Center for an appointment. Hrblock com To find the number, go to www. Hrblock com irs. Hrblock com gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Hrblock com TTY/TDD equipment. Hrblock com If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. Hrblock com TeleTax topics. Hrblock com Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Hrblock com Refund information. Hrblock com To check the status of your 2009 refund, call 1-800-829-1954 during business hours or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Hrblock com Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Hrblock com If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Hrblock com Have your 2009 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Hrblock com Refunds are sent out weekly on Fridays. Hrblock com If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. Hrblock com Evaluating the quality of our telephone services. Hrblock com To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. Hrblock com One method is for a second IRS representative to listen in on or record random telephone calls. Hrblock com Another is to ask some callers to complete a short survey at the end of the call. Hrblock com Walk-in. Hrblock com Many products and services are available on a walk-in basis. Hrblock com Products. Hrblock com You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Hrblock com Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Hrblock com Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. Hrblock com Services. Hrblock com You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. Hrblock com An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. Hrblock com If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. Hrblock com No appointment is necessary—just walk in. Hrblock com If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. Hrblock com A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. Hrblock com If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. Hrblock com All other issues will be handled without an appointment. Hrblock com To find the number of your local office, go to www. Hrblock com irs. Hrblock com gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Hrblock com Mail. Hrblock com You can send your order for forms, instructions, and publications to the address below. Hrblock com You should receive a response within 10 days after your request is received. Hrblock com Internal Revenue Service1201 N. Hrblock com Mitsubishi MotorwayBloomington, IL 61705–6613 DVD for tax products. Hrblock com You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. Hrblock com Prior-year forms, instructions, and publications. Hrblock com Tax Map: an electronic research tool and finding aid. Hrblock com Tax law frequently asked questions. Hrblock com Tax Topics from the IRS telephone response system. Hrblock com Internal Revenue Code—Title 26 of the U. Hrblock com S. Hrblock com Code. Hrblock com Fill-in, print, and save features for most tax forms. Hrblock com Internal Revenue Bulletins. Hrblock com Toll-free and email technical support. Hrblock com Two releases during the year. Hrblock com – The first release will ship the beginning of January. Hrblock com – The final release will ship the beginning of March. Hrblock com Purchase the DVD from National Technical Information Service (NTIS) at www. Hrblock com irs. Hrblock com gov/cdorders for $30 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the DVD for $30 (plus a $6 handling fee). Hrblock com Small Business Administration The Small Business Administration (SBA) offers training and educational programs, counseling services, financial programs, and contract assistance for small business owners. Hrblock com The SBA also has publications and videos on a variety of business topics. Hrblock com The following briefly describes assistance provided by the SBA. Hrblock com Small Business Development Centers (SBDCs). Hrblock com   SBDCs provide counseling, training, and technical services to current and prospective small business owners who cannot afford the services of a private consultant. Hrblock com Help is available when beginning, improving, or expanding a small business. Hrblock com Business Information Centers (BICs). Hrblock com   BICs offer a small business reference library, management video tapes, and computer technology to help plan a business. Hrblock com BICs also offer one-on-one assistance. Hrblock com Individuals who are in business or are interested in starting a business can use BICs as often as they wish at no charge. Hrblock com Service Corps of Retired Executives (SCORE). Hrblock com   SCORE provides small business counseling and training to current and prospective small business owners. Hrblock com SCORE is made up of current and former business people who offer their expertise and knowledge to help people start, manage, and expand a small business. Hrblock com SCORE also offers a variety of small business workshops. Hrblock com    Internet. Hrblock com You can visit the SBA website at www. Hrblock com sba. Hrblock com gov. Hrblock com While visiting the SBA website, you can find a variety of information of interest to small business owners. Hrblock com    Phone. Hrblock com Call the SBA Answer Desk at 1-800-UASK-SBA (1-800-827-5722) for general information about programs available to assist small business owners. Hrblock com    Walk-in. Hrblock com You can walk in to a Small Business Development Center or Business Information Center to request assistance with your small business. Hrblock com To find the location nearest you, visit the SBA website or call the SBA Answer Desk. Hrblock com Other Federal Agencies Other federal agencies also publish publications and pamphlets to assist small businesses. Hrblock com Most of these are available from the Superintendent of Documents at the Government Printing Office. Hrblock com You can get information and order these publications and pamphlets in several ways. Hrblock com Internet. Hrblock com You can visit the GPO website at www. Hrblock com access. Hrblock com gpo. Hrblock com gov. Hrblock com Mail. Hrblock com Write to the GPO at the following address. Hrblock com Superintendent of DocumentsU. Hrblock com S. Hrblock com Government Printing OfficeP. Hrblock com O. Hrblock com Box 979050St. Hrblock com Louis, MO 63917-9000 Phone. Hrblock com Call the GPO toll-free at 1-866-512-1800 or at 202-512-1800 from the Washington, DC area. Hrblock com Prev  Up  Next   Home   More Online Publications
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Hrblock com 4. Hrblock com   Student Loan Interest Deduction Table of Contents Introduction Student Loan Interest DefinedQualified Student Loan Qualified Education Expenses Include As Interest Do Not Include As Interest When Must Interest Be Paid Can You Claim the DeductionNo Double Benefit Allowed Figuring the DeductionEffect of the Amount of Your Income on the Amount of Your Deduction Which Worksheet To Use Claiming the Deduction Introduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. Hrblock com However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Hrblock com For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. Hrblock com This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. Hrblock com The student loan interest deduction is taken as an adjustment to income. Hrblock com This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). Hrblock com This chapter explains: What type of loan interest you can deduct, Whether you can claim the deduction, What expenses you must have paid with the student loan, Who is an eligible student, How to figure the deduction, and How to claim the deduction. Hrblock com Table 4-1. Hrblock com Student Loan Interest Deduction at a Glance This table summarizes the features of the student loan interest deduction. Hrblock com Do not rely on this table alone. Hrblock com Refer to the text for complete details. Hrblock com Feature   Description Maximum benefit   You can reduce your income subject to tax by up to $2,500. Hrblock com Loan qualifications   Your student loan: •must have been taken out solely to pay qualified education expenses, and •cannot be from a related person or made under a qualified employer plan. Hrblock com Student qualifications   The student must be: •you, your spouse, or your dependent, and  •enrolled at least half-time in a degree program. Hrblock com Time limit on deduction   You can deduct interest paid during the remaining period of your student loan. Hrblock com Limit on modified adjusted gross income (MAGI)   $155,000 if married filing a joint return; $75,000 if single, head of household, or qualifying widow(er). Hrblock com Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. Hrblock com It includes both required and voluntary interest payments. Hrblock com Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period for an eligible student. Hrblock com Loans from the following sources are not qualified student loans. Hrblock com A related person. Hrblock com A qualified employer plan. Hrblock com Your dependent. Hrblock com   Generally, your dependent is someone who is either a: Qualifying child, or Qualifying relative. Hrblock com You can find more information about dependents in Publication 501. Hrblock com Exceptions. Hrblock com   For purposes of the student loan interest deduction, there are the following exceptions to the general rules for dependents. Hrblock com An individual can be your dependent even if you are the dependent of another taxpayer. Hrblock com An individual can be your dependent even if the individual files a joint return with a spouse. Hrblock com An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). Hrblock com Reasonable period of time. Hrblock com   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. Hrblock com   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. Hrblock com The expenses relate to a specific academic period, and The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. Hrblock com   If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances. Hrblock com Academic period. Hrblock com   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Hrblock com In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Hrblock com Eligible student. Hrblock com   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Hrblock com Enrolled at least half-time. Hrblock com   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Hrblock com   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Hrblock com However, the standard may not be lower than any of those established by the U. Hrblock com S. Hrblock com Department of Education under the Higher Education Act of 1965. Hrblock com Related person. Hrblock com   You cannot deduct interest on a loan you get from a related person. Hrblock com Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. Hrblock com ), Your lineal descendants (children, grandchildren, etc. Hrblock com ), and Certain corporations, partnerships, trusts, and exempt organizations. Hrblock com Qualified employer plan. Hrblock com   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. Hrblock com Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. Hrblock com They include amounts paid for the following items. Hrblock com Tuition and fees. Hrblock com Room and board. Hrblock com Books, supplies, and equipment. Hrblock com Other necessary expenses (such as transportation). Hrblock com The cost of room and board qualifies only to the extent that it is not more than the greater of: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Hrblock com Eligible educational institution. Hrblock com   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Hrblock com S. Hrblock com Department of Education. Hrblock com It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Hrblock com   Certain educational institutions located outside the United States also participate in the U. Hrblock com S. Hrblock com Department of Education's Federal Student Aid (FSA) programs. Hrblock com   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. Hrblock com   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. Hrblock com The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. Hrblock com    The educational institution should be able to tell you if it is an eligible educational institution. Hrblock com Adjustments to Qualified Education Expenses You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items. Hrblock com Employer-provided educational assistance. Hrblock com See chapter 11, Employer-Provided Educational Assistance . Hrblock com Tax-free distribution of earnings from a Coverdell education savings account (ESA). Hrblock com See Tax-Free Distributions in chapter 7, Coverdell Education Savings Account. Hrblock com Tax-free distribution of earnings from a qualified tuition program (QTP). Hrblock com See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program. Hrblock com U. Hrblock com S. Hrblock com savings bond interest that you exclude from income because it is used to pay qualified education expenses. Hrblock com See chapter 10, Education Savings Bond Program . Hrblock com The tax-free part of scholarships and fellowships. Hrblock com See Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Hrblock com Veterans' educational assistance. Hrblock com See Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Hrblock com Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Hrblock com Include As Interest In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest. Hrblock com Loan origination fee. Hrblock com   In general, this is a one-time fee charged by the lender when a loan is made. Hrblock com To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. Hrblock com A loan origination fee treated as interest accrues over the term of the loan. Hrblock com   Loan origination fees were not required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. Hrblock com If loan origination fees are not included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. Hrblock com The method shown in the example below allocates equal portions of the loan origination fee to each payment required under the terms of the loan. Hrblock com A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable. Hrblock com Example. Hrblock com In August 2004, Bill took out a student loan for $16,000 to pay the tuition for his senior year of college. Hrblock com The lender charged a 3% loan origination fee ($480) that was withheld from the funds Bill received. Hrblock com Bill began making payments on his student loan in 2013. Hrblock com Because the loan origination fee was not included in his 2013 Form 1098-E, Bill can use any reasonable method to allocate that fee over the term of the loan. Hrblock com Bill's loan is payable in 120 equal monthly payments. Hrblock com He allocates the $480 fee equally over the total number of payments ($480 ÷ 120 months = $4 per month). Hrblock com Bill made 7 payments in 2013, so he paid $28 ($4 × 7) of interest attributable to the loan origination fee. Hrblock com To determine his student loan interest deduction, he will add the $28 to the amount of other interest reported to him on Form 1098-E. Hrblock com Capitalized interest. Hrblock com   This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Hrblock com Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. Hrblock com No deduction for capitalized interest is allowed in a year in which no loan payments were made. Hrblock com Interest on revolving lines of credit. Hrblock com   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. Hrblock com See Qualified Education Expenses , earlier. Hrblock com Interest on refinanced student loans. Hrblock com   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. Hrblock com    If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. Hrblock com Voluntary interest payments. Hrblock com   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. Hrblock com Example. Hrblock com The payments on Roger's student loan were scheduled to begin in June 2012, 6 months after he graduated from college. Hrblock com He began making payments as required. Hrblock com In September 2013, Roger enrolled in graduate school on a full-time basis. Hrblock com He applied for and was granted deferment of his loan payments while in graduate school. Hrblock com Wanting to pay down his student loan as much as possible, he made loan payments in October and November 2013. Hrblock com Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November. Hrblock com Allocating Payments Between Interest and Principal The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. Hrblock com To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal. Hrblock com Example. Hrblock com In August 2012, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. Hrblock com The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. Hrblock com The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. Hrblock com At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2012 through October 2013) and adding it to the outstanding principal balance of the loan. Hrblock com The loan is payable over 60 months, with a payment of $200. Hrblock com 51 due on the first of each month, beginning November 2013. Hrblock com Peg did not receive a Form 1098-E for 2013 from her lender because the amount of interest she paid did not require the lender to issue an information return. Hrblock com However, she did receive an account statement from the lender that showed the following 2013 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest). Hrblock com Payment Date   Payment   Stated Interest   Principal November 2013   $200. Hrblock com 51   $44. Hrblock com 27   $156. Hrblock com 24 December 2013   $200. Hrblock com 51   $43. Hrblock com 62   $156. Hrblock com 89 Totals   $401. Hrblock com 02   $87. Hrblock com 89   $313. Hrblock com 13 To determine the amount of interest that could be deducted on the loan for 2013, Peg starts with the total amount of stated interest she paid, $87. Hrblock com 89. Hrblock com Next, she allocates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). Hrblock com A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Hrblock com Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Hrblock com Assuming that Peg qualifies to take the student loan interest deduction, she can deduct $401. Hrblock com 02 ($87. Hrblock com 89 + $10 + $303. Hrblock com 13). Hrblock com For 2014, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. Hrblock com She also will apply the remaining amount of capitalized interest ($625 − $303. Hrblock com 13 = $321. Hrblock com 87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes. Hrblock com Do Not Include As Interest You cannot claim a student loan interest deduction for any of the following items. Hrblock com Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. Hrblock com Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. Hrblock com Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. Hrblock com For more information, see Student Loan Repayment Assistance in chapter 5, Student Loan Cancellations and Repayment Assistance. Hrblock com When Must Interest Be Paid You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off. Hrblock com Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. Hrblock com Your filing status is any filing status except married filing separately. Hrblock com No one else is claiming an exemption for you on his or her tax return. Hrblock com You are legally obligated to pay interest on a qualified student loan. Hrblock com You paid interest on a qualified student loan. Hrblock com Claiming an exemption for you. Hrblock com   Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c. Hrblock com Example 1. Hrblock com During 2013, Josh paid $600 interest on his qualified student loan. Hrblock com Only he is legally obligated to make the payments. Hrblock com No one claimed an exemption for Josh for 2013. Hrblock com Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2013 Form 1040 or 1040A. Hrblock com Example 2. Hrblock com During 2013, Jo paid $1,100 interest on her qualified student loan. Hrblock com Only she is legally obligated to make the payments. Hrblock com Jo's parents claimed an exemption for her on their 2013 tax return. Hrblock com In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2013. Hrblock com Interest paid by others. Hrblock com   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. Hrblock com Example 1. Hrblock com Darla obtained a qualified student loan to attend college. Hrblock com After Darla's graduation from college, she worked as an intern for a nonprofit organization. Hrblock com As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. Hrblock com This payment was treated as additional compensation and reported in box 1 of her Form W-2. Hrblock com Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return. Hrblock com Example 2. Hrblock com Ethan obtained a qualified student loan to attend college. Hrblock com After graduating from college, the first monthly payment on his loan was due in December. Hrblock com As a gift, Ethan's mother made this payment for him. Hrblock com No one is claiming a dependency exemption for Ethan on his or her tax return. Hrblock com Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return. Hrblock com No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest). Hrblock com Figuring the Deduction Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. Hrblock com However, the amount determined above may be gradually reduced (phased out) or eliminated based on your filing status and MAGI as explained below. Hrblock com You can use Worksheet 4-1. Hrblock com Student Loan Interest Deduction Worksheet (at the end of this chapter) to figure both your MAGI and your deduction. Hrblock com Form 1098-E. Hrblock com   To help you figure your student loan interest deduction, you should receive Form 1098-E. Hrblock com Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. Hrblock com   For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Hrblock com Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. Hrblock com However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. Hrblock com See Allocating Payments Between Interest and Principal , earlier. Hrblock com    The lender may ask for a completed Form W-9S, or similar statement to obtain the borrower's name, address, and taxpayer identification number. Hrblock com The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses. Hrblock com Effect of the Amount of Your Income on the Amount of Your Deduction The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). Hrblock com You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). Hrblock com Modified adjusted gross income (MAGI). Hrblock com   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest. Hrblock com However, as discussed below, there may be other modifications. Hrblock com Table 4-2 shows how the amount of your MAGI can affect your student loan interest deduction. Hrblock com Table 4-2. Hrblock com Effect of MAGI on Student Loan Interest Deduction IF your filing status is. Hrblock com . Hrblock com . Hrblock com AND your MAGI is. Hrblock com . Hrblock com . Hrblock com THEN your student loan interest deduction is. Hrblock com . Hrblock com . Hrblock com single,  head of household, or qualifying widow(er) not more than $60,000 not affected by the phaseout. Hrblock com more than $60,000  but less than $75,000 reduced because of the phaseout. Hrblock com $75,000 or more eliminated by the phaseout. Hrblock com married filing joint return not more than $125,000 not affected by the phaseout. Hrblock com more than $125,000 but less than $155,000 reduced because of the phaseout. Hrblock com $155,000 or more eliminated by the phaseout. Hrblock com MAGI when using Form 1040A. Hrblock com   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). Hrblock com MAGI when using Form 1040. Hrblock com   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any amount on line 33 (student loan interest deduction), line 34 (tuition and fees deduction), or line 35 (domestic production activities deduction), and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Hrblock com MAGI when using Form 1040NR. Hrblock com   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form figured without taking into account any amount on line 33 (student loan interest deduction) and line 34 (domestic production activities deduction). Hrblock com MAGI when using Form 1040NR-EZ. Hrblock com   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form figured without taking into account any amount on line 9 (student loan interest deduction). Hrblock com Phaseout. Hrblock com   If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. Hrblock com To figure the phaseout, multiply your interest deduction (before the phaseout) by a fraction. Hrblock com The numerator is your MAGI minus $60,000 ($125,000 in the case of a joint return). Hrblock com The denominator is $15,000 ($30,000 in the case of a joint return). Hrblock com Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct. Hrblock com Example 1. Hrblock com During 2013 you paid $800 interest on a qualified student loan. Hrblock com Your 2013 MAGI is $145,000 and you are filing a joint return. Hrblock com You must reduce your deduction by $533, figured as follows. Hrblock com   $800 × $145,000 − $125,000  $30,000 = $533   Your reduced student loan interest deduction is $267 ($800 − $533). Hrblock com Example 2. Hrblock com The facts are the same as in Example 1 except that you paid $2,750 interest. Hrblock com Your maximum deduction for 2013 is $2,500. Hrblock com You must reduce your maximum deduction by $1,667, figured as follows. Hrblock com   $2,500 × $145,000 − $125,000  $30,000 = $1,667   In this example, your reduced student loan interest deduction is $833 ($2,500 − $1,667). Hrblock com Which Worksheet To Use Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR. Hrblock com However, if you are filing Form 2555, Foreign Earned Income, Form 2555-EZ, Foreign Earned Income Exclusion, or Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1. Hrblock com Student Loan Interest Deduction Worksheet at the end of this chapter. Hrblock com Claiming the Deduction The student loan interest deduction is an adjustment to income. Hrblock com To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 33 (Form 1040NR), or line 9 (Form 1040NR-EZ). Hrblock com Worksheet 4-1. Hrblock com Student Loan Interest Deduction Worksheet 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. Hrblock com Before using this worksheet, you must complete Form 1040, lines 7 through 32, plus any amount to be entered on the dotted line next to line 36. Hrblock com 1. Hrblock com Enter the total interest you paid in 2013 on qualified student loans. Hrblock com Do not enter  more than $2,500 1. Hrblock com   2. Hrblock com Enter the amount from Form 1040, line 22 2. Hrblock com       3. Hrblock com Enter the total of the amounts from Form 1040,  lines 23 through 32 3. Hrblock com           4. Hrblock com Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 4. Hrblock com           5. Hrblock com Add lines 3 and 4 5. Hrblock com       6. Hrblock com Subtract line 5 from line 2 6. Hrblock com       7. Hrblock com Enter any foreign earned income exclusion and/or housing  exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 7. Hrblock com       8. Hrblock com Enter any foreign housing deduction (Form 2555, line 50) 8. Hrblock com       9. Hrblock com Enter the amount of income from Puerto Rico you are excluding 9. Hrblock com       10. Hrblock com Enter the amount of income from American Samoa  you are excluding (Form 4563, line 15) 10. Hrblock com       11. Hrblock com Add lines 6 through 10. Hrblock com This is your modified adjusted gross income 11. Hrblock com   12. Hrblock com Enter the amount shown below for your filing status 12. Hrblock com     •Single, head of household, or qualifying widow(er)—$60,000       •Married filing jointly—$125,000     13. Hrblock com Is the amount on line 11 more than the amount on line 12?       □ No. Hrblock com Skip lines 13 and 14, enter -0- on line 15, and go to line 16. Hrblock com       □ Yes. Hrblock com Subtract line 12 from line 11 13. Hrblock com   14. Hrblock com Divide line 13 by $15,000 ($30,000 if married filing jointly). Hrblock com Enter the result as a decimal  (rounded to at least three places). Hrblock com If the result is 1. Hrblock com 000 or more, enter 1. Hrblock com 000 14. Hrblock com . Hrblock com 15. Hrblock com Multiply line 1 by line 14 15. Hrblock com   16. Hrblock com Student loan interest deduction. Hrblock com Subtract line 15 from line 1. Hrblock com Enter the result here  and on Form 1040, line 33. Hrblock com Do not include this amount in figuring any other  deduction on your return (such as on Schedule A, C, E, etc. Hrblock com ) 16. Hrblock com   Prev  Up  Next   Home   More Online Publications