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Is My Student Loan Interest Deductible?

Congratulations! You’ve finished your degree. You’re out in the workforce building your career.

You’re filing taxes, and getting small refunds…

Then you get a nice raise.

And Bam!… What?… No more refund? And panic strikes.

How did this happen!? Why is the line for my student loan interest deduction blank or less than what I entered?

“I double checked my data entry. Is my Student Loan Interest Deductible?”

 

 

Well, the good news is…You made more money this year. The bad news? Your student loan interest deduction may be gone or reduced.

For those of you starting your career while paying off student loans, losing this deduction can come as quite a shock during tax season. For someone in the 25% tax bracket, losing this deduction could mean a $625 difference in your taxes. Which could flip you from a refund into a balance due.

Let’s take a look behind the scenes…

Generally, up to $2500 of qualified student loan interest per taxpayer is deductible. So even if you paid $4000, the most you can ever deduct is $2500.

However, taxpayers with modified adjusted gross income over $80,000 completely lose their ability to deduct student loan interest.  Sorry. We don’t write the tax code. So those in the $65-80k range will still get a deduction – but it’s reduced. Take a look at the table below (IRS Tax Code – Table 4-2.Effect of MAGI on Student Loan Interest Deduction).

student loan interest deductions IRS Table 4.2

There’s a fancy IRS calculation to get to the exact reduction amount, but since it probably excites me more than most taxpayers, I’ll let the mathematically curious use this link to access the IRS calculation.

For a rough determination – if you are in the middle of the phase out range ($72,500 Single / $145k Married-filing-jointly) you’ll be able to deduct half of $2500, or a maximum of $1250.

The maximum deduction amount hasn’t been increased since 2001. So if you think this is unfair, please contact your congressperson and ask them to consider new legislation regarding student loans.

congress list of proposals for interest deductions

We don’t like to toot our own horns much…but this is a good example of why it is beneficial to have a solid tax professional in your corner. You might save a few dollars on preparation fees by doing it yourself, but a tax professional will give you a heads up when you are going to phase out of deductions like this. We also want to help you eliminate costly surprises during tax season.

A little back story for any of you history buffs –

Student loan interest was deductible until 1986. Changes during the Reagan years included the ‘Act to the Internal Revenue Code of 1986’; which repealed the deduction for personal interest (including student loans).

Clinton’s 1997 changes made student loan interest deductible again in 1998, with the maximum deduction set at $1000, and only deductible for the first 5 years of the loan. It was indexed to $2000 in 1999, and $2500 in future years.

The 2001 Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), changes temporarily eliminated the 5 year rule, and the limit remained at $2500.  These provisions have been extended over the last few years, but continue to see fights in congress regarding details and permanency.

Written by Rita Devlin

Rita has been with DePauw Johnson since 2012. She has been a CRTP since relocating to San Diego in 2007. Prior to that, she worked in accounting for several small businesses in NYC, and assisted with a variety of tax and accounting work at her family's New Jersey CPA firm. Rita has an Economics degree from Bucknell University and is currently pursuing her EA certification.

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