As elementary to senior students across the country head back to school this month, parents are wondering how to afford school fees, buy school supplies, and fit into all of those extracurricular activities. It can be difficult to figure everything out, and in an age when everyone seems to have an opinion about school (and pay for it), it can be even more difficult to separate fact from fiction. In my Back To School Myths series, I’m going to help you sort through the truths and myths about school and taxes. The first myth I’m going to tackle: there is no longer a deduction for student loan interest.
TRUTH: Student loan interest stays in place.
So why so much talk about the disappearance of student loan interest? It probably started as part of a meme that appeared earlier this year:
(You can read more about the meme and what to consider before sharing tax and budget memes, click here.)
The meme – and the rumor that followed – was likely related to the history of the tax reform bill. Under the House and Senate proposals, most above-the-line deductions, including the interest deduction on student loans, would have been eliminated. This did not happen: In the final version of the Tax Cuts and Jobs Act of 2017, the interest deduction on student loans remained in place.
(You can read more about what survived the Tax Chopper – and what didn’t – here.)
Yet the rumor persisted. This was further complicated by the publication of draft Form 1040 this summer. The current Form 1040 includes the line for deducting student loan interest on the first page. However, in the new draft, the student loan interest deduction no longer appears in the news, leading some taxpayers to conclude that it has been removed. This does not happen.
(You can read more about the new “postcard-sized” tax return here.)
So let’s clear up the myth that the student loan interest deduction is gone once and for all on closer inspection.
Allowing a deduction for interest paid on personal loans, including mortgage interest, has long been controversial. Interest on student loans was in fact not deductible for about a decade after the 1986 Tax Reform Act. However, this changed in 1997 when, under the Taxpayer Relief Act, the deduction of interest paid for student loans was used to pay for graduate studies. on an individual tax return has been reinstated. It has been slightly modified since then but remains deductible.
(For more on the history of student loans, check out this previous post.)
Today, you can reduce your income subject to tax each year by up to $ 2,500 in interest on eligible student loans per tax return. It is by declaration, not by taxpayer: the ceiling is the same for married couples as for individuals. The amount includes compulsory and voluntary interest payments.
Your student loan must have been taken out to pay for eligible educational expenses. This includes tuition and fees; books, supplies and equipment; and other necessary costs such as transportation. Room and meals may be included, but some restrictions apply.
To be deductible, your student loan does not necessarily have to come from the PHEAA or another institutional student loan organization. You can include other debt, such as credit cards, bank loans, or a line of credit if you only use these loans to pay for eligible educational expenses—not expenses combined. Borrowed funds cannot come from a related person or be paid under a qualifying employer plan.
The student who borrowed the funds must be you, your spouse or your dependent, and must have been enrolled at least half-time in a degree program at the time the loan is taken out. For the purposes of deducting interest on student loans, a person may be your dependent same if you are the responsibility of another taxpayer; same whether the individual is filing a joint return with a spouse; and same whether the individual had gross income for the year equal to or greater than the amount of the exemption for the year.
As with other educational tax breaks, you must reduce your eligible educational expenses by the total amount paid for the educational assistance provided by the employer; tax-free distribution of income from a Coverdell Education Savings Account or Qualifying Education Program (QTP); Interest on US savings bonds previously excluded from income; non-taxable scholarships, scholarships and grants; and veteran benefits.
You can usually deduct any interest you paid on your student loan until the loan is paid off, subject to phase-outs. The interest deduction on student loans is phased out (reduced) if your modified adjusted gross income (MAGI) is greater than $ 80,000, or $ 165,000 if you are completing a joint return; for most taxpayers, MAGI is the adjusted gross income on their federal tax return before subtracting any deduction for student loan interest. You cannot deduct interest from your student loan if you separately file a marriage declaration or if someone else is claiming an exemption for you on their tax return.
If someone else is making a payment on your behalf, the payment may be treated for federal tax reasons as if you had made the payment. For example, if your mom and dad are paying off part of your loans, you can still claim the interest for the purposes of the deduction. But be careful: if your parents claim you as a dependent, but you are legally obligated to pay the loan, then neither of you can benefit from the deduction.
You should receive a tax form from your lender each year showing the amount of interest you paid. Typically, if your lender received interest payments of $ 600 or more during the year, the lender is required to send you a Form 1098-E by January 31.
(To learn more about Form 1098-E, click here.)
In past years, the student loan interest deduction was shown on the first page of 1040 on line 33. This is technically an income adjustment, sometimes referred to as an “over-the-line” deduction, since you can claim it without taking into account the deductions in Schedule A.. Or in simpler terms, you can deduct the interest on your student loan if you claim the standard deduction or if you itemize your deductions.
Today, this line 33 is effectively missing on the first page of the draft Form 1040. So where did it go? It has been moved to a new Annex 1 (you can consult the draft of Annex 1 in pdf format here), where it remains temporarily on line 33:
Hope this clears up the confusion. The interest deduction on student loans has not been eliminated as part of the tax reform; it has just been moved to a new time.
For more on the series, follow this week!