 Hello, and welcome to the session in which we would look at the student loan interest deduction, which is an adjustment for AGI. There are a bunch of adjustments for AGI, and student loan interest deduction is one of them. What could be other deductions for AGI? Educator expense, IRA deduction, health savings account, self-employment health insurance, deduction for self-employment tax, and other deductions. We're going to look at all of them separately in separate recording, but today we're going to be focusing on student loan deduction. And it's important to understand it's an adjustment for AGI. It means it gets deducted before you get to AGI because we're going to have deductions for AGI and deductions from AGI. Now, once I show you on the forum, I'm going to show you clearly what do I mean by for and from because that's an important to distinguish. And many CPA exam questions, they want you to know whether you know a deduction is for or from AGI. It makes a big difference. We'll discuss those in a moment. Before I start, I would like to remind you that if you are an accounting student or a CPA candidate, especially if you are a CPA candidate, I strongly suggest you visit my website. Take a look at my website, forhatlectures.com. If you don't replace your CPA review course, if you are taken widely-glimped or any other CPA course, please keep them. What I can do is I can be a useful addition. I can add 10 to 15 points to your CPA exam by explaining the material differently. Maybe better, maybe not better, but definitely differently than your CPA review course where they go over everything very quickly. I don't do so. I don't assume any prior knowledge. I explain things from scratch. So this is how I can help you understand the material better, which in turn can help you pass the exam. Your risk is one month of subscription. Give me a chance. Try me out. Your potential gain is passing the exam. Are you willing to take that chance? And if not for anything, take a look at my website to find out how well your university is doing or not doing on the CPA exam. I do have resources for other courses, multiple choice, true, false exercises, all sorts of things. Please connect with me on LinkedIn and take a look on my LinkedIn recommendation. What students, other people that use my system to pass the exam, how did they use it, like this recording, connect with me on Instagram and Facebook. So what is the big idea for student loan interest deduction? Simply put, when you attend school, oftentimes in the U.S., people borrow money. They borrow money. When you borrow money, guess what? You're going to be incurring interest. The interest that you incurred on your student loan might be deducted. What does it mean might be deducted? It means it's going to reduce your adjusted gross income. What does that mean? It means it's going to reduce your taxes. It's going to save you some money. So that's the big idea is you pay to go to school. As a result, the government will give you some deduction to help you pay for your school. That's basically how it works. So an individual can take a deduction, which is an amount equal to the interest paid by the taxpayer during the taxable year on any qualified education loan. We'll talk about what's qualified education loan in a moment. Now, only the person legally obligated to make the interest payment can take the deduction. However, that person cannot be claimed as a dependent. So if you are a dependent, you cannot take the interest loan deduction. Once you're no longer a dependent, I'll give you, for example, my cousin. My cousin, Lorine, that's her name. When she was in school, she's legally responsible for the loans, but she was being claimed by my aunt and uncle. Because of that, they were taken the interest loan deduction. Once she's no longer a dependent of them, she's now filing. She went to Drexel. She has a successful career now. Now she's not a dependent. Now she's still responsible for the loan, but now she can take them because she no longer a dependent. Nor a person who files merit filing separately. It's just a penalty. If you merit filing separately, the government says, guess what? We are not going to let you take this deduction. Now, what is the amount? The maximum amount is 2,500 per year. And guess what? I'm sure you guessed it. That amount will be further limited by your modified adjusted gross income. Simply put, the government is going to say, you might be making too much money. We're going to take away that amount from you. And if you're a CPA or an accounting student, look, two to three years after college, you should be no longer be able to deduct this. Okay, because you should be making decent amount of money where you are going to cross the modified adjusted gross income, or at least I hope so. Right? So let's take a look at the big picture, how this old picture fits together. Remember, or not, you don't have to remember, but this is your income line. One through line nine is your income. This is where you add your income. Let's assume your total income is 100,000 just for the sake of illustration. Then from your income, you can deduct something called deduct adjustments. The deduct adjustment from schedule one, line 22, you put some number here. Now, let's assume, and let's take a look at schedule one. This is schedule one. And basically, you have a bunch of deductions which are called adjustment to income. And one of them is called student, not student and fees deduction, student interest loan deduction. So this is the place where the maximum you can take is 2,500. So let me change this to 50,000 rather than 100,000. So let's assume you did pay interest and you have more than 2,500. So the maximum you can deduct is 2,500. And let's assume that's the only deduction. So what's going to happen, you're going to come here and put from schedule from schedule one, 2,500. So your total adjustments is 2,500. Now you're adjusted gross income. An important figure for your return is 47,500. So notice as a result of this 2,500 that was transferred to your line 10A, you were able to reduce your taxable income to come up to your adjusted gross income. And this is what I mean. This deduction is for AGI four, just like all these deductions, which we're going to look at later. All these deductions are for AGI. It means this is AGI and they come before AGI. Now we are going to have deductions from AGI. So make sure you know the difference. Now in the US what happened when you have student loan interest, they will tell you exactly how much student loan interest received by the lender, whoever the lender is, your bank, the financial institution, they will tell you how much you can put in this number. Obviously, again, it cannot be more than 2,500, but this is the form that they send you every year. Luckily for me, I'm no longer receiving this because I paid off my loan. Although now there is a talk that they're going to be, they're going to be canceling the student loan. That's a loss for me. I shouldn't have paid my loan, but that's a different story. Okay, so they'll have your account number, so on and so forth. Anyhow, so what is a qualified education loan? So the loan has to be an education loan. Well, first of all, it has to be incurred by the taxpayer for what purpose to pay qualified education expense, which we're going to see what qualified education expenses are. It can be on behalf of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer at the time the loan was incurred. The loan must be for the sole purpose of educational expenses. So if you took a home equity loan, if you took a loan against your home, or you took a revolving credit card like a credit card, those don't qualify. So if you used your credit card to pay off your college that doesn't qualify, the interest does not qualify as educational loan. The interest, okay? The interest does not qualify, okay? Please keep that in mind, okay? So qualified education expenses must be paid or incurred within a reasonable period of time on or after the loan date, and usually there's a 90-day test. You don't have to worry about this. Expenses meet this test of the proceeds of the loan are dispersed within 90 days of the start of the academic year or 90 days after. It doesn't really matter. The course of the study can be graduate or undergraduate. So simply put, the money that you take, it has to be used for educational purposes, not for anything else. So the loan is for that purpose. Although you might use your credit card, that's a loan, but that's not qualified education loan. So what are qualified educational expenses? Well, what are qualified educational expenses? Cost of attending an eligible institution, and we're going to see what eligible institution is. There's a lot of qualifying words here, just terms we need to be familiar with. What could be eligible educational expenses? Tuition, fees, books, supplies, equipment, room and board, transportation or other necessary expenses of attendance. This is what qualify. So you took the loan for that purpose. If you took the loan for these purposes, that's good. Those are legitimate purposes. However, the taxpayer must reduce qualified expenses by the amount of income executed from gross income in each of the following cases. Now, sometimes what happens is, okay, you paid your college with the loan, but you received money from another source. If that money is not included in income for the purpose of paying your education, then you cannot take the deduction. What are we talking about here? Let's assume your employer paid your education, paid some money on your behalf. Well, you paid the money, then they reimburse you. Well, guess what? You no longer have a loan because they gave you that money. Okay, so the employer paid. You have to reduce the amount of that money. Any redemption of U.S. savings bond used to pay higher education, tuition and fees. So if you sold some of the savings bond to pay higher education fees, guess what? Then you cannot have it both ways. And we're going to see what does that mean. If you took money from a Coverdell Education Savings Account, those savings accounts are specifically for college expenses. Then you have to reduce them. If you received a Qualified Tax-Free Scholarship or Fellowship, you have to reduce your educational expenses, Armed Forces or Veteran Educational Assistance Allowance. Any other educational assistance excludable from gross income. Okay, you don't include GIF, B-Quest, GIF somebody gave you some things. When someone died and they gave it to you, that doesn't include it like inheritance. In this category include a State Qualified Tuition Plan. Let's take a look at this example. In September LeBron spent $3,000 on Qualified Educational Expenses. He received a loan for $2,800 in the same month as he paid the expenses. Well, during September he also received a scholarship of $500, which he properly executed was not included in income, as you saw in the prior chapter. Well, what are the Qualified Educational Expenses? It's only $2,500. Although he incurred $3,000, we have to reduce them by $500. So his Qualified Educational Expenses is $2,500. Now he took the loan for $2,800. Well, guess what? Now when it comes to interest, you can only account for the interest that was incurred on the $2,500, not on the $2,800. So interest on the $2,800 of the $2,800 loan will be eligible for student loan interest treatment, while the interest incurred on the additional $3,000. It's non-deductible interest like a credit card interest. So make sure you reduce your Qualified Educational Expenses by any of those, by any of those. Because simply put, you cannot have your cake and eat it. That's basically how it is. Now, eligible institution, what are the eligible colleges? Well, deductible educational expenses must incur in connection with attendance of an eligible. Remember, we thought it has to be a Qualified Loan, eligible expenses, eligible institution. What are eligible institutions? Simply put, practically, any post-secondary educational institution that meet the requirement to participate in the federal student loan program. I mean, if you are a real person, you would know this because the bank has given you a loan for educational purposes. This includes all four-year colleges and universities, two-year community colleges, many trade and technical schools. Most likely, if you're listening to this recording, you belong to one of these schools. Therefore, you are good. The classification also incorporate institution with internship or residency program, leading to a degree or a certificate awarded by an Institute of Higher Education, a hospital, a healthcare facility that offer post-graduate training. Technically, practically, any school that, any legitimate school, okay? For example, if you sign up with Mike, school far-hat lectures, then you don't get your, if you borrowed money, you don't get your interest deduction. But basically, if you notice, it's an open door simply put. Now, let's talk about the limitation, which is now we're going to get into the computation. Remember, you are limited to 2,500, regardless of how much you paid. You are limited to 2,500 max. The deduction on the interest on qualified loan may be limited based on something called modified adjusted gross income. Now, how do we compute modified adjusted gross income? We'll take adjusted gross income and we'll add to it any deduction for student loan interest. We'll go back and we add to it any deduction for student loan interest, add back to it any foreign U.S. possessing or Puerto Rican income excluded from taxable income. So if you receive any income that was executed, you go back and you add it any of these income, any deduction taken for tuition and fees, which we'll talk about the deduction later. You add them back. That's all what it is. Now, once you get the modified adjusted gross income, so the deductible amount of student loan reduced when the modified adjusted gross income reached 140 on joint return and 70 on single and is totally eliminated when modified adjusted gross income reached 170 and 85,000. Let's talk about a single person. Simply put, we have, this is 17K and this is 85K. Simply put, any amount below 70,000, if you're single, you can get the 2,500. I still remember when I used to get my 2,500. Okay? Long time ago. Well, once you pass 70,000, up to 85,000, this is called the range. The range is 15,000. You're going to see this number again. Then your 2,500 will start to go down. Start to go down. Once you reach 85,000 and you move on, that's it. Forget about this. If you are married, the numbers are different. If you are married, you will start at 140 and it will go away at 170. Your deduction will go away at 170. And the range, we call the range, where you, when you're going to get your, when you get your 2,500 reduced, the range is 30,000. And you will see why I'm using this term range because you're going to see it in the computation. So I want you to see where this number is coming from. Okay? So the preliminary deduction times, which is whatever it is. If you paid more than 2,500, this could only be 2,500 max, 2,500 max. If you paid less, it's less times a fraction, which we're going to see below. It will tell you what's the disallowed interest, the interest that you cannot take. So here's how it works. For married taxpayer, you will take modified, adjusted gross income. Usually it's going to be adjusted gross income. For most people, it's going to be adjusted gross income, but modified adjusted gross income, but again, it's modified adjusted gross income and you deduct from it 140,000. Whatever amount remaining, you divide it by 30,000 and that's going to be the disallowed interest. Remember this formula tells you what is the disallowed interest. Same thing for a single taxpayer. You will take modified adjusted gross income minus 70,000 divided by 15,000. Okay? Divided by 15,000. So you're looking, here's, it's a fraction. The best way to illustrate this is to actually work an example. So these fraction represent the disallowed proportion of the preliminary deduction. Okay? So the fraction will show you what's the disallowed proportion. Again, the preliminary deduction cannot exceed 2,500 because that's the maximum you qualify for. Now, if you only paid $1,000 in interest deduction, then this will be $1,000. The best way is to look at some numbers. We have Al and Mary-Ann borrowed $30,000 on qualified educational loan to pay for qualified educational higher expenses for their two children. During 2020, they paid 1,800 in interest loan. Okay? Now we need to know more information. Let's assume their AGI on the return is 160,000. How do they, they are entitled to 6,000. How do we compute this? Well, let's see. We'll take 160. This is their modified adjusted gross income minus 100 and 140. Simply put, this is 20,000. So their 20,000 above the limit, their third divided by 30,000, remember the range. Simply put, if you remember this, what I showed you, it looks something like this. This is married filing jointly, they're above 140, but they're below 170. So the range is 30,000. And they are, they are here. They are in the range. They are two-third in the range. This is the fraction. They are two-third into the range. Okay? Two-third. What is two-third? Two divided 20,000 divided by 30,000 is two-third. They're two-third into the range. Therefore, we're going to take this fraction multiplied by the preliminary, by the preliminary deduction, which is 1,800. Well, and that's going to give us the disallowed amount. 1,200. Therefore, the allowed, they can deduct 600, but they are disallowed 1,200. Okay? So they are in the range. They did not go above the range, but they're only toward the end of the range. Notice here, they're toward the end of the range. Now, what if they paid 3,200 in interest? Well, if they paid 3,200, we're going to take only 2,500 times two-third. And this will be disallowed amount. And this disallowed amount will be 1,667. They can still deduct $833. Although they paid 3,200, the preliminary deduction is 2,500 times this fraction, times this fraction. Once again, if their AGI is 180, just forget it. Don't do any computation. They don't qualify for anything. If their modified adjusted gross income, 110,000, then yes, they're good. They're below 140. Therefore, they qualify for 2,500 if they paid 3,200. Obviously, here, if they paid 1,800 and their modified adjusted gross income is 110, they can take the whole thing, 1,800. So the maximum is 2,500. Then you have to find the fraction, and that fraction will tell you the amount that's not deductible. Be careful because often students, they switch this. They think that's the amount that's allowed. That's the amount that's not allowed. It means you cannot deduct it. Be careful. Don't confuse the two. Students do this all the time, especially on the CPA exam. Again, at the end of this recording, I'm going to invite you to take a look at my website, farhatlectures.com. I explain the material differently. I help you pass the exam. My information goes with your CPA review course, whatever CPA review course you are taking. I only ask you to give me a try. Many students did in the past. They succeeded on their exam. I hope you do. Good luck, study hard, and of course, stay safe.