 Income tax 2023-2024, student loan interest deduction. Get ready and some coffee so you can recognize the quacks when doing income tax preparation 2023-2024. Most of this information can be found in the Instructions for Schedule 1 section of the Form 1040 Instructions Taxure 2023, which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, we're focused online to Adjustment to Income, which you might hear called above-the-line deductions or Schedule 1 deductions remembering. The first half of the income tax formula is basically a funny income statement. Most income statements having income minus expenses resulting in net income here having income minus deductions resulting in taxable income, noting deductions for taxes are good, therefore we're constantly looking to increase deductions. The primary difference between deductions being two categories, adjustments to income or above-the-line deduction versus the below-the-line deduction, the greater of either standard or itemized deductions. The above-the-line deductions or adjustments to income are not subject to that threshold that has to be cleared before they can be beneficial such as having to be above the standard deduction as is the case when we talk about the itemized deductions. This is the first page of the Form 1040 Income section where on Line 10, Adjustments to Income from Schedule 1, Line 26. This is the Schedule 1 Part 2, Adjustments to Income, our focus this time on Line 21, Student Loan Interest Deduction. Alright, so Line 21, Student Loan Interest deduction. You can take this deduction only if all the following apply. You paid interest in 2023 on a qualified student loan. So note when we think about student loan interest, how does this take place? Clearly, what is the government trying to do? Incentivize education. What actually happens? They end up subsidizing education, which increases the price of education. First, a word from our sponsor. Yeah, actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us, but that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com and that's why we have these very high tuition fees and whatnot. But the general idea, try to incentivize education. How? Well, when people take out loans in order to pay for education, we can give them a tax benefit on the loans once they start repaying it, giving the interest portion, which is kind of like the rent on the loan, a tax advantage standpoint where you might be able to deduct the interest. Now, quick recap of the income tax system and the types of deductions that are natural to an income tax system. In other words, if we tax income as we do in the United States for federal income tax purposes, it would make sense not to tax gross income, but rather net income, which we can see when we look at business income, such as a sole proprietorship typically reported on a Schedule C where we have income minus expenses, basically business deductions to get to net income. It would not make sense to tax the top line of the Schedule C because if you had to expend money to generate that income, then you should be taxing the net income, the bottom line of the income statement. When we think about most people that are employees, the idea there is they don't have any deductions because the employer is the one that are making the expenditures necessary in order to help them to generate the revenue. Now, when we look at interest then, how does interest fit into that scenario? Well, if you had a Schedule C type of business, you would think that if you had to take a loan to buy equipment, for example, that you used to help generate revenue, you have our paying rent on the loan in the form of interest, which is similar to paying rent on an office building to help you do business in it and generate revenue. You needed the purchasing power of the dollars upfront and therefore you're willing to pay rent on the purchasing power, which is basically interest. Therefore, you would think it would be deductible in that case. However, if you buy personal things like a personal car or credit card expenditures, you would think that those things would not be deductible if you bought personal stuff with them because it's not a business expense. You didn't need to pay the rent on the loan in order to generate the revenue. Now, the exception to that is like the home. Like when you buy a house and this is probably because for political reasons they wanted to put this in place because it looks good politically. Also, the people that are lobbyists for housing benefit from this as well in that the mortgage interest is typically deductible. So when you take a loan out in order to purchase a home, the interest on the loan could be deductible on a Schedule A. That being a little bit different because it's an itemized deduction as opposed to this adjustment to income or above the line deduction, it too probably subsidized the housing industry, which results in higher housing prices, which is basically the end result from an economic standpoint. So the same thing is happening here. We're going to take the loans out and then when you pay back the loan, then possibly you get a benefit by being able to deduct the interest on the loan this time as an above the line deduction. To do that, you would have had to have a loan that qualifies as a student loan. So then the question of course comes up, what qualifies as a student loan? All right, so filing status is any status except married filing separately. Remember that married filing separately, usually the IRS is skeptical of that filing status may limit deductions for it because they're skeptical that people will abuse the ability to file married or separate and take advantage of certain phaseouts and whatnot. So your modified adjusted gross income AGI is less than $90,000 if single head of household or qualifying surviving spouse, 185,000 if married filing jointly. So we have an AGI limitation. Remember that when we think about AGI limitations, we're thinking about basically income limitations, the idea being, well, if you get more income than that, or if you have a really high income, well then the degree that you got paid off, right? Because now you're getting a high income and you would think in that case you would be able to pay back the loans that you took, including the interest without basically a tax, you know, benefit or incentive from it would be the general idea. Also note that they usually apply it on the adjusted gross income AGI, which is the income after the income minus the above the line deductions. So most of these phaseouts are based on at least the starting point of an adjusted gross income type of number. Okay, so use lines two through four of the worksheet and these instructions to figure your modified adjusted gross income. Why does it say modified? Well, they typically start with the AGI and then they modify it from there. In part, you kind of have to consider this one because the deduction is an adjustment for income, meaning it's going to be an above the line deduction, which will have an impact on adjusted gross income. So we'll have a circular reference when we try to figure out this phaseout thing if we don't make some kind of adjustment to the adjusted gross income. We'll talk more about that in the software example in a future presentation. So you or your spouse if filing jointly aren't claimed as a dependent on someone else's such as your parents 2023 tax return. So don't include any amount paid from a distribution of earnings made from a qualified tuition program. That's a QTP after 2018. To the extent that earnings are treated as tax free because they were used to pay student loan interest use the worksheet and these instructions to figure your student loan interest deduction exception publication 970 instead of the worksheet and these instructions to figure your student loan interest deduction if you file form 2555 because that you might have foreign income in that case which often complicates the calculation or 4563 or you exclude income from sources within Puerto Rico. Alright, so let's get into then what is a qualified student loan. So remember that when you take out the actual loan that means you're taking out the loan and getting the money when you're paying back the student loan that me might be at a point in time after you've already gone through school right because at that point in time now you're paying back the student loan with the interest. So you're typically thinking about someone that possibly was in school or maybe is still in school but now they're repaying the student loans but they had to be loans that were qualified student loans if you possibly can get the interest deduction. So what does that mean a qualified student loan is any loan you took out to pay the qualified higher education expenses for any of the following individuals who were eligible students. So number one yourself or your spouse. So obviously that should be fairly obvious right it was for you or the spouse number two any person who was your dependent when the loan was taken out. So somebody in essence basically on your tax return. So this is the student loan deduction worksheet. I won't go through it in detail here because in a following presentation we'll take a look at it in the tax software and see a little bit more of the calculation then three any person you could have claimed as a dependent for the year the loan was taken out except that a the person filed a joint return b the person had gross income that was equal to or more than the exemption amount for that year or 4,700 for 2023 or c you or your spouse of filing jointly could be claimed as a dependent on someone else's return. However a loan isn't a qualified student loan if any of the proceeds were used for other purposes. So clearly if it's a student loan and you took out the loan and bought a hundred thousand dollar car with it you would think well that shouldn't qualify what are we trying to subsidize there we're not trying to subsidize you buying a hundred thousand dollar car and whatnot that kind of you know so any guess the loan was was from either a related person or a person who borrowed the proceeds under a qualified employer plan or a contract purchased under such a plan for details there you can see publication 970 qualified higher education expenses so usually it's fairly straightforward higher education typically being in college but we have a bunch of other institutions that you know would be questionable as to what about a trade school or something like that and we see that the higher education seems to be going to heck in a hand basket or something so that is there any other kind of what if I have some other school that might not drive me insane that I can go into and could I get my loan and have it qualified there qualified higher education expenses generally include tuition fees room and board and related expenses such as books and supplies so these are the things that of course we spent the the money on the expenses must be for education in a degree certificate or similar program at an eligible educational institution so this so clearly an eligible educational institution usually we're thinking basically a college in that instance and again what are the types of things that you can spend it on qualified education expenses generally include tuition obviously fees that makes sense room and board that's more inclusive than some other areas of educational expenses and related expenses such as books and supplies okay and eligible educational institution includes most colleges universities and certain vocational schools so certain vocational schools are added there which so you can still keep your sanity and not let the the major colleges drive you crazy or something and possibly still get some subsidization for that so for details you can see publication 970