@QRFMTOA wrote:
@Hal_Al @Opus 17
Although my daughter is being claimed as a dependent by my wife and I, can my daughter still deduct the interest?
Ah, yes, that may be a problem. The year in question is 2023, not 2021, since the loan interest was paid in 2023. If your daughter is claimed as your dependent on your 2023 tax return, she can't deduct the student loan interest that was paid on her behalf, and therefore no one can.
Note, your daughter is asked two questions on her tax return. First, "Can you be claimed as a dependent by someone else?" Second, "Will the person who could claim you, actually claim you this year?" If she qualifies to be claimed as a dependent, she must answer Yes to the first question, even if she answers No to the second question.
If your daughter qualifies to be claimed as a dependent but you don't claim her, you lose a $500 credit.
If her income is less than $13,850, the deduction will not save her anything even if she is allowed to take it. If her income is between $13,850 and $58,575, the deduction will save her 10% or 12% of the amount of interest that was paid for her. Even at the maximum interest deduction of $2500, she would save no more than $300, against the $500 credit you lose. Only if her income is more than $58,575 will she save more by deducting the interest than you will lose in credits.
Also, whether or not you claim your daughter affects who gets the American Opportunity Credit, you or her. And depending on her income, she may get less AOTC on her own return than you would if you claimed her.
The only way to know for sure is to test different scenarios. But it seems likely that, if she is still your dependent, then no one claims the student loan interest deduction for the amounts the grandmother paid off. It's just a wonderful gift, but with no additional tax benefits.
