In this continuing series I’ve been writing about all the changes you can anticipate to the tax laws beginning in 2010 and 2011. You can go to this page to see the index of all the changes that are coming as a result of expiring provisions from previous years.
The ability to deduct interest on student loans is not going away entirely, but rather the old restrictions are being reapplied, making it more difficult to use this deduction. For a large number of folks, this is going to cause an unexpected increase in taxes beginning in tax year 2011 (on top of everything else that’s changing!).
Through Tax Year 2010
The present law allows you to deduct up to $2,500 of interest for student loans for all years that interest payments are required. This deduction is an above-the-line deduction, taken on line 33 of the 1040 form, which reduces your Adjusted Gross Income (AGI). Reducing AGI is important because so many other taxes and deductions are tied to the level of the AGI or Modified AGI.
The deduction is phased out starting at Modified AGI of $60,000 and is completely phased out at a Modified AGI of $75,000 for single filers. For Married Filing Jointly (MFJ), the phase-out range is between $120,000 and $150,000 of MAGI.
Beginning in 2011
With the expiration of the more liberal provision, the old rules come back into effect – which means that beginning with tax year 2011, you’re still allowed to deduct up to $2,500 of interest on student loans, but only during the first 60 months of the loan payment period. After the first 60 months, interest is no longer deductible. (Note: Of course, this is in place because most everyone has their student loans paid off in five years, right? Especially if your MAGI is in the range to take advantage of the provision… geez.)
The deduction phase-out range is much more restricted, as well: between $40,000 and $55,000 MAGI for singles and between $60,000 and $75,000 MAGI for MFJ.
Of course, this and all the other expiring provisions could be extended or a new provision put in place. We’ll just have to wait and see how things pan out between now and the end of 2010.
Photo by Cornell University Library
I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry. . Read more from this author
