Student Loan Interest Tax Deduction Has a Hitch Trap

If there’s one thing that causes panic in the ranks of Baby Boomers and Gen Xers, it’s the idea that their Millennials will never reproduce or even walk down the aisle. Marriage rates are tumble while the proportion of young women returning to their families is skyrocketing. And among singles, “financial security” is the first prerequisite for marital happiness.

Ironically, one of the tax provisions that can contribute to the financial security of a Millennial – the interest deduction on student loans – works as an argument against marriage.

We’ll see why this is in a second, but first, the basics of this tax break: If you’re paying off student loans, you can deduct up to $ 2,500 in interest you paid last year. your income for 2015. Note that this is a tax deduction and not a tax credit. A tax credit reduces what you owe in taxes, dollar for dollar.

When I was a 22 year old naive, I was actually happy to do my taxes because I thought I was guaranteed a $ 2,500 repayment, since I had paid over $ 2,500 in loan interest. student. Spoiler alert: I didn’t get $ 2,500 from Uncle Sam that year. I didn’t even get a $ 2,500 reduction on my taxes. Instead, I had a deduction of $ 2,500. This means that it reduced my taxable income by $ 2,500 which, if you pay taxes at a marginal rate of 25%, saves you $ 625. If you’re in the 15% tax bracket – which, if you’re single, means your taxable income for 2015 is less than $ 37,451 – you’ll save just $ 375.

A tax savings of $ 625 or $ 375 is not to be despised. But there are a few catches. The first is that once your income exceeds a certain level, your ability to claim this deduction begins to gradually wane. If you are single, the student loan deduction gradually decreases between $ 65,000 and $ 80,000 from modified adjusted gross income (MAGI). So even if you paid $ 2,500 or more in student loan interest last year, your deduction will be reduced if your MAGI is greater than $ 65,000. Once it hits $ 80,000, you won’t be able to claim a single penny. Granted, $ 80,000 might seem like a lot of money – and, indeed, it’s higher than the median household income in the United States – but if you borrow six figures in a six-figure paid job , as a consultant, lawyer, or doctor, you won’t even get a whiff of tax relief for paying all that student loan interest.

If you are married and filing jointly, the phase-out of the deduction starts at $ 130,000 from MAGI and ends at $ 160,000, which seems fair enough as it is double the phase-out range of the income for a single person.

Corn this is where this nasty millennial marriage penalty comes in: a married couple can only claim one deduction of $ 2,500 . In other words, if you and your spouse each paid $ 2,500 plus student loan interest last year, you cannot claim a deduction of $ 5,000; you can only claim $ 2,500. No double soaking allowed. And if you think you can get around that rule by filing separately, the IRS is already one step ahead of you: if you choose separate married reporting status, neither of you can claim the interest deduction.

Is it worth giving up marriage for an additional $ 2,500 tax deduction? Probably not. This is worth at most $ 625 in annual tax savings. It wouldn’t even cover the cost of an average wedding dress. But I wouldn’t blame anyone for that either. Last year 68% of Americans said they plan to use their tax refund to help pay off debt – so if that’s money you’re really relying on, I can understand you didn’t want to do anything that would reduce your refund.

At the very least, knowing the millennial marriage penalty can give you ammunition for the next time a curious family member hassled you about your marital status. Say “sorry, but I want to claim the FULL student loan interest deduction!” Won’t get rid of it forever, but your taxes should give you a little respect and at least a brief respite from marital worries. (The downside: they might ask you for help with their taxes.)