It’s been four months since my last blog post, and though I apologize for not posting more often, there hasn’t been much to report about on the taxation front as our current Presidential administration attempts to push its tax reform proposals through Congress while trying to explain how the decreased revenue the federal government needs will be replaced. So far, no real answers on that front.
Our President is not the only one proposing changes to our federal tax code, however realistic or unrealistic they may be. Six different Congressional representatives, together, have sponsored a new bill that proposes a potentially beneficial change to those who pay student loan interest, known as the Student Loan Interest Tax Deduction Expansion Act, also known as bill number HR3573. I am not one to get very political on my blog or with clientele, but I think this proposed change in the law merits some attention, as many of my clientele are paying a substantial amount of student loan interest every year and there has been a constant call for student loan reform over the last ten years. For some, the interest is deductible and saves them a noticeable amount of federal tax, while for others it has much less of an effect on their return or no effect at all. This proposed change could significantly increase the deduction for those already receiving it, and potentially grant a deduction to those who earned too much to benefit from the interest deduction before.
Currently, student loan interest paid during a year is deductible from your taxable income whether you itemize deductions or not – if you do not itemize and take the standard deduction, you also receive a deduction for student loan interest, just as you would if you itemized deductions. However, the total amount you may deduct is capped at $ 2500 per year, no matter how much you paid. Also, if you file as single or head of household, and your annual income is greater than $ 65,000, the deduction begins phasing out and phases out entirely if your total income is $ 80,000 or more. For those filing joint returns with their spouse, the deduction begins to phase out at $ 130,000 and phases out entirely at $ 160,000 in annual income. For anyone paying over $ 2500 in student loan interest every year and/or earning more than these income thresholds, the monthly student loan payment can be a constant thorn in the side if it does nothing to reduce annual taxes, as was the case for me about three years after I finished graduate school – I continued to make student loan payments for another 6 years, but not a penny of the interest was deductible because my income exceeded threshold for single filers (not asking for any sympathy here, just expressing my frustration over a deduction I enjoyed for three years and then had taken away from me).
Under the proposed new law, the amount of deductible student loan interest would be capped at a much higher $ 7500 for single filers and $ 15,000 for married filers, and would be disallowed (not gradually phased out) for single filers with income of more than $ 100,000 per year and married filers with income totaling more than $ 200,000 per year. I have numerous clients who would either see a greater deduction or receive a new deduction they were not receiving before. At least a few clients of mine are below the current annual income thresholds and allowed to take the deduction but pay well more than the current cap of $ 2500 in student loan interest; this proposed change would be of great benefit to them.
Just like our president’s tax proposals, this would reduce the revenue flowing to the federal government, at least in the short term, and it is doubtful that the final version of this law, if it passes, will have the loan interest deduction caps and income thresholds as they are proposed now. Nevertheless, we have heard numerous news stories about the constant push for student loan reform, and I think this would be a step in the right direction. If you currently pay student loan interest, whether or not this proposed law would benefit you, I urge you to contact your congressional representative (who can be found on the website www.house.gov by entering your zip code) and tell them you believe HR3573 is a bill worth supporting. I know it would have helped me for all those years I wrote monthly checks to Sallie Mae but received no tax benefit for all the interest I paid.