For years, news headlines have been rife with the catchphrases “student loan epidemic” and “student debt crisis.” Unfortunately, these expressions are not hyperbolic; tuition costs continue to rise each year, and federal subsidies are not keeping pace. As a result, students must pay more every year to attend college. Taxpayers are taking years and even decades to completely pay off the costs. For those Americans who are currently repaying student loans, there may be one consolation: Those bills can often be paid at a tax discount.
Basics of the Student Loan Interest Deduction
The student loan interest deduction lets taxpayers deduct up to $2,500 of the interest they pay on student loans each year. Even for those who are married and filing jointly, the overall $2,500 limit applies; it does not double like you might expect. But this deduction can still be powerful.
There is one caveat: Mid- and high-income taxpayers may be ineligible for the full deduction. For the 2018 tax year, the benefit is reduced for individuals earning more than $65,000 ($135,000 for married couples), and vanishes for those earning more than $80,000 ($165,000 for married couples).
Impact of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA), signed by President Trump in December 2017, preserved the student loan interest deduction, to the surprise of many. Earlier versions of the tax reform bill nixed it, along with some other above-the-line deductions. And thanks to other changes in the TCJA, the deduction may be more relevant in the future. Because the TCJA raised the standard deduction, fewer taxpayers will benefit from itemizing. But all taxpayers, whether they itemize or not, are eligible for the student loan interest deduction.
Other Tax-Saving Opportunities
Student loan interest is not the only education-related benefit available to taxpayers. Other opportunities include:
- Education tax credits. The American Opportunity Credit and the Lifetime Learning Credit are available for those still in school. The American Opportunity Credit can reduce your tax bill by up to $2,500 per student, of which up to $1,000 can be paid back to you in the event your tax bill is zero. Most taxpayers who use the American Opportunity Credit do so for undergraduate students as this credit is only available to students who have not completed four years of post-secondary education. Alternatively, taxpayers can consider the Lifetime Learning Credit, which offers up to $2,000 of qualified education expenses for all students included in the tax return. Most taxpayers who use the Lifetime Learning Credit do so for graduate students. Keep in mind that both credits cannot be used in the same tax year for the same student, and like the interest deduction, there are income phase-outs that may preclude some from taking these credits.
- Education savings programs. Qualified tuition programs, also known as 529 plans, are run by state governments and allow taxpayers to pay for education-related expenses using tax-free distributions. Some states even provide a state tax deduction for contributing to a 529 plan. Taxpayers may also want to consider a Coverdell Education Savings Account, which allows them to save up to $2,000 each year for education expenses with tax-free withdrawals.
- IRA withdrawals for college. Taxpayers can take early withdrawals from their IRA without penalty if the funds pay for higher education for themselves or their spouse, children, or grandchildren.
While the rising costs of college and student loan debt can be burdensome, there are some tax-saving measures to consider. If you have questions about any of the benefits above, please contact us. Your CRI professional would love to walk you through the options and help you decide what’s best for you and your family.