Why is my 1098-E interest on the undergraduate line for state tax return? It is grayed out and I can't change it; there was no distinction made on the federal return.

[MaryK4]

Can you clarify which state?  For example, in Massachusetts you can only deduct undergraduate student loan interest, so you cannot adjust it.

[gemgirl387]

Yes, for Massachusetts.  While the screen I was referring to made the distinction between undergrad and grad and put the amount from the federal taxes in the wrong category, the next screen categorized the interest as general.  After I reviewed the actual form, the interest is put on line 10 for student loan interest as opposed to line 12, which is for undergrad loan interest deduction.  Perhaps the software just erred on the side of caution and put it on line 10, which seems appropriate. 

Hopefully, TurboTax has a way to deal with graduate school tuition for Massachusetts in the event that I end up taking courses this year.  I know that this cannot be credited for my state (which I learned the hard way) but the tax software I was using before brought it over to my state taxes and cost me some money for a few tax years.

[ErnieS0]

You only need to differentiate between graduate and undergraduate student loan interest if the interest you paid is more than $2,500.

Massachusetts allows 2 student loan interest deductions for interest paid on a "qualified education loan:"

• The federal deduction for both graduate and undergraduate student loan interest paid (Reported on Schedule Y, Line 10, has a $2,500 maximum amount allowed)
• The Massachusetts deduction for interest paid on a qualified undergraduate student loan (Reported on Schedule Y, Line 12, is unlimited)

Therefore the first $2,500 will be general student loan interest which is why you are not able to adjust it.

However, suppose you paid $5,000 ($1,000 graduate and $4,000 undergraduate) then you could claim $2,500 as general interest ($1,000 graduate + $1,500 undergraduate to get to the $2,500 federal cap) and the remaining $2,500 as undergraduate interest.

See: Student Loan Interest Deductions