Student loan payments are not qualified education expenses (see below), for federal or MD state tax purposes.
Student loans are used to pay for qualified education expenses. You can deduct qualified education expenses in the year they are incurred, but you cannot take another deduction when you pay back the loan.
You can deduct the interest portion of student loan repayments, subject to limitations. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily pre-paid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. , which you can deduct at the time they are incurred. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.
Qualified expenses
There are five main categories that constitute qualified expenses.
- Tuition, fees, books, supplies, and equipmentare all qualified expenses. They are grouped because these are all expenses that must be required by the school for enrollment or attendance at the institution. If a fee is not required by the school, such as drama club fees, it would be considered non-qualified.
- Room and board, which includes the costs of rent (whether living on or off-campus), and food. To be considered qualified, these costs must be less than or equal to the room and board allowance from the college’s cost of attendance figures (provided by the school; example) or the actual amount charged by the school if living in on-campus housing. So, if the total cost living off-campus exceeds the school’s allowance, the student would have to pay the difference using funds from another source. The beneficiary must be enrolled at least half-time for room and board expenses to qualify regardless of whether they are on- or off-campus.
- Computers, peripheral equipment, computer software, and internet access charges are all considered qualified expenses. This is a recent change from the 2015 PATH Act for the benefit of 529 account owners, whereas previously the school had to specifically require these items. Now account owners can reimburse themselves for a laptop and printer without a worry.
- If the beneficiary has a disability, certain special needs services and equipment needed for enrollment or attendance may qualify. This includes transportation costs, which are generally not considered a qualified expense, as well as equipment such as a wheelchair or prosthetics.
- As a result of the 2017 Tax Cuts and Jobs Act, up to $10,000 for tuition at public, private, or religious K–12 schools is now considered qualified. However, this is limited to tuition only, and you need to be cautious depending on your state. Not every state conforms to federal code for this expense. This means while your K-12 tuition withdrawal would be federal tax-free, the state may impose tax on earnings and – potentially – claw back any prior state tax benefits taken. As a result, you should contact your state and, potentially, a tax professional prior to making a withdrawal for K-12 tuition expenses.
