 Income Tax 2022-2023. Student Loan Interest deduction. Let's do some wealth preservation with some tax preparation. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information can be found at the form 1040 instructions tax year 2022 instructions for Schedule 1 additional income and adjustments to income the adjustments to income section which you could find in the IRS website irs.gov irs.gov looking at our income tax formula we're focused once again on the adjustments to income remember in the first half of the formula is in essence an income statement where we have income minus the equivalent of the expenses those being deductions gets us to the equivalent of net income that being taxable income our goal it's flipped on its head we want taxable income as low as possible as opposed to normally when we want net income as high as possible we call this second item adjustments to income you might hear them call above the line deductions or schedule one deductions you could think of them as deductions or contra income accounts because they're going to be decreasing the income line to get down to that key number the agi the adjusted gross income the number often used to calculate phase outs on things like deductions and credits as income levels rise also note that we don't have that same kind of hurdle with the adjustments to income as we do with the itemized deductions that we would have to clear before they benefit us so if we qualify for an adjustment to income above the line deduction that could be a good thing that we can take even if we don't clear the hurdle of the standard deduction down here on line number 10 adjustments to income from schedule one here is the schedule one we're looking at the student loan interest deduction now this one obviously is a fairly straightforward type of deduction if you have student loans that are qualified student loans you should we receive documentation related to the interest portion of the payments that you may be able to deduct and it might be dependent upon whether you can deduct it or not the amount of your agi you could have say income limitations as your income level goes up it's also an interesting topic with regards to personal debt personal finance and government policy questions you often get asked when doing tax preparation so I'll just give a few thoughts on them note that when people get into debt issues one of the strategies is often to try to consolidate the debt trying to take the debt out of the areas where you have the high interest payments often credit cards and put them in an area where hopefully you have lower interest payments possibly using something as collateral to support the loan like a home or a car or something like that and that may be able to facilitate say lower interest payments lower rent on the purchasing power of the money in essence and also give you some standardization over time instead of having these fluctuation of interest payments that you might have with say a credit card which can give you a little bit more peace of mind to think about what your strategy is going forward now note when you think about student loans with regards to that policy gets a little bit confusing because one the interest payments are usually fairly reasonable they're not bouncing all over the place like with a credit card for example but even if you can get a lower interest payment if you were able to pay off the student debt and consolidate the debt somewhere else some would argue that that wouldn't be a good strategy because one you get the deduction and the deduction here could be a beneficial item but then you've got to figure in and calculate how much actual benefit you're getting from the deduction because of course this deduction is just a reduction of net income you're not actually getting a dollar for dollar interest back of the 2000 it depends on your actual tax rate so that's one issue the other thing that often comes up is people say well the governments at some point in time is just going to wipe out all student debt which they are threatening to do and say they could possibly actually do that which is an interesting scenario just from a policy perspective because you can see you could see people's behavior when when you say you're going to take out debt and then we're just gonna we're gonna say that we're not gonna we're gonna wipe out the debt at some future time obviously that will incentivize people to take on take on more debt which they don't expect to actually pay off so that's an interesting so that might actually be true I wouldn't really depend on that to happen and I and I and I think it's actually bad incentive wise for the for the health long-term health of the economy because because it obviously will incentivize behavior of people taking on more debt than they otherwise would or could handle with the expectation that they're just not gonna end end up having to pay it off and that's not a good strategy to be learning usually although again it could pay off given given given the current situation so that's just the dynamics of that which are kind of interesting so any case line 21 student loan interest deduction you can take this deduction only if all of the following apply you paid interest in 2022 on a qualified student loan defined later so typically you'll get documentation if it's a qualified student loan but standard student loans you got a loan a general loan for higher education would be the general idea or the general case your filing status is any status except married filing separately once again if you're married you and you decide that you want to file separately you can't go back to head a household or single you gotta file married filing separately and the iris is quite skeptical of people doing that to try to take advantage of certain areas on the tax code such as deducting interest for example because if you file married filing separately possibly you would be able to take the deduction because of the income threshold isn't there so anything that has a phase out of income thresholds the iris is going to be skeptical of people separating their married returns to file separate to take advantage of you know income thresholds possibly so that's another example that married modified adjusted gross income a GI is less than 85,000 if single head of household or qualified surviving spouse or 175,000 if married filing jointly use lines two through four of the worksheet in these instructions to figure your modified a GI so that kind of makes sense to me obviously that you know that you would think that it would phase the the amount of deduction you would get with phase out because your loan paid off obviously if you're making over 85,000 if you went to school and you took a loan to get the education and then you're now you're making 85,000 or 175 which is another interesting topic because when they talk about wiping out the student loans sometimes they talk about these these people income thresholds that are quite high you know it's like well if someone's making like 400,000 dollars why do we need to wipe out their loan or something you know but so it's a kind of an interesting dynamic dynamic on the loans with regards to the policy and again I don't know the answers what you should do for you personally given the structure of the policy should you hang on to the loans even though it would be more beneficial to consolidate them because you think that the government's gonna wipe out the loans in the future should you should you actually structure your thought process on on your political your political leanings based on the fact that you want to get your student loan paid off you know I know that's I don't know so you or your spouse have finally jointly art claimed as a dependent on someone else's such as your parents 2022 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 the earnings are treated as tax-free because they were used to pay student loan interest so use the worksheet and these instructions to figure your student loan deduction so you can check out the worksheet if you so choose obviously tax software will be helpful in practice to be determining these of the amount of the deduction on the interest the thing that you want to understand in your mind is basically yeah I should get documentation on the student loan interest typically it should be fairly easy to do the data input on and if your income is above a certain threshold then you might have a phase out in terms of the student loan interest that you're going to be able to deduct it is an above the line deduction not an itemized deduction so if you're not phasing out you should get a benefit from it because you don't have to clear the standard deduction in order to get it so exception use publication 970 instead of the worksheet and these instructions to figure your student loan interest deduction if you file form 2555 or 4563 or you exclude income from sources within Puerto Rico qualified student loan 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 number one yourself or your spouse that one seems fairly obvious so you took out a loan for yourself or your spouse because you're one entity for taxes and and now you're paying back the interest on it so that the interest portion might be deductible remember remember not the whole payment not the whole payment is deductible just the interest for my portion the chart the part they charged for for the use of the money the purchasing power the renting of the money to any person who was your dependent when the loan was taken out three any person you could have claimed as a dependent for the year the loan was taken out except that a the person filed the joint return B the person had gross income that was equal to or more than the exemption amount for that year or four thousand four hundred dollars for two thousand twenty two or you or your spouse filing jointly could claim as a dependent on someone else's return so generally the concept would be if it's someone on your return you your spouse you're dependent then you would think the education expenses were related to them then you would think you'd get the deduction and then you've got number three which is this weird area where they might not be claimed as a dependent but you've got but they're still going to qualify because of either a B or C however a loan isn't a qualified student loan if a any of the proceeds were used for other purposes or B the loan 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 detail C publication 970 so I think this is mostly the case for many many people in the college town right they actually didn't spend the money on the education they spent it on like beer and or whatever but you know so so in that case then you know I and again obviously if if there's an incentive that their student loan money out there and the idea would be that you they might just wipe out the student loan money going forward that will probably leave to people trying to scam student loan money and spend it maybe even not on staff on student loans right so so again I think the incentive structures we got to kind of be careful on them although I can understand one in the student loans to be to be wiped out and whatnot which might in the case qualified higher education expenses qualified higher education expenses generally include tuition fees room and board and related expenses such as books and supplies those which you got to spend the money on in order for the loan to be a legit loan now note that when we talk about these education things we've got the hope credit we've got this qualified tuition that we talked about there's there's different areas we talked about like the the well any case there's different areas where you have this this idea of what you need to spend the money on to qualify for education type of things and sometimes they're different if you're talking about like the student interest versus like like a grant or something do I have to include that in an income versus like the hope and lifetime credits which are credits for higher education so you can't you sometimes you get those things kind of muddied up in your mind you say I you know all all those rules are the same if it's qualified higher education expenses room and board and the books and whatnot and the tuition well sometimes those things aren't all the same right so you got to make sure that you're applying the money what you're spending the money on to the proper area for the student education component that you're looking at whether that be the student loan here or whether that be the hope lifetime credit and whatnot so the expenses must be for education in a degree certificate or similar program at an eligible educational institution and eligible educational institution includes most colleges universities and certain vocational schools for detail see publication 970