Tax Act Begot Above-the-Line Deduction For Student Loan
I have some questions regarding the tax credit available for interest payments on student loans as provided in last year' s tax reform bill. When does the credit take effect? What are the ceilings for each year? Is it an above-the-line deduction? How many years can you receive the credit? Are there any exceptions (especially for loans taken out for a graduate or professional degree)?
Congress littered last year's tax bill with a remarkable array of confusing opportunities guaranteed to send people running to their nearest accountant to have their taxes prepared.
One of the many "education incentives" offered with the 1997 Tax Act is the new deduction for student loan interest. This isn't a tax credit. Instead it is what is known as an above-the-line deduction, which means that you can take this deduction even if you don't itemize. Tax credits reduce your tax. Deductions reduce the income on which tax is calculated.
Under the new law you can take a deduction for interest paid on loans incurred to pay undergraduate or graduate college tuition, room and board, and other related expenses (such as lab fees and books). You are entitled to the deduction if the interest was paid on behalf of your own education or that of your spouse or a dependent.
Before you get too excited about deducting your college loan interest, take a look at the income threshold that applies to people who want to take advantage of this little tax treat. For single taxpayers, you must have adjusted gross income (before considering your college loan interest deduction) of no more than $40,000 (there is a phase-out range of $40,000-$55,000 wherein you can take a partial deduction).
Married taxpayers face a $60,000 adjusted gross income ceiling (with a $60,000 to $75,000 phase out range). So if you're single, making $60,000, and paying off those college loans, you can forget about a deduction for the interest. Or if you and your spouse have adjusted gross income of $80,000 and are paying for your child's education, you'll have to pay the interest on his loans without the help of Uncle Sam.
For you math heads out there, if you are single and your adjusted gross income is $50,000, you will reduce the deduction by 2/3. You get this fraction by dividing the amount by which your income exceeds $40,000 (in this case, $10,000) by $15,000 (the amount of the phase-out range).
If you are paying off your own college loans but you can still be claimed as a dependent on your parents' tax return, you may not take this deduction.
The student for whom the loans were acquired must be or have been at least a half-time student during the period for which education costs were paid. Therefore, if you take only one course per semester, not only will it take you a lifetime to graduate, you won't be entitled to this deduction for student loan interest.
The most you can deduct under this option is $1,000 in 1998, $1,500 in 1999, $2,000 in 2000 (appropriate), $2,500 in years after 2000 (unless of course Congress changes its collective mind and decides to alter these amounts). For example, if you paid $1,200 in interest on students loans in 1998, you can only deduct $1,000. If your interest was $600, your deduction is $600.
The deduction is available starting on 1998 tax returns (in other words, not until you file your tax return in the Spring of 1999).
You can still take advantage of this law, even if you are paying off loans that originated prior to 1998. The deduction is for interest paid on college loans during the first 60 months in which the interest is required to be paid. In other words, if you have been making payments on your college loans for eight years, you're out of luck as far as this deduction is concerned. But if 1998 is only the second year of your loan repayments, you'll get four years of tax returns on which you can take this deduction (assuming your income doesn't rise above the threshold).
copyright © 1998 - Gail Perry