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Archives for May 2014

Deduct Student Loan Interest

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Interest on qualifying student loans is deductible.  The deduction is an above-the-line deduction so taxpayers do not have to itemize to benefit from the deduction.  The maximum amount of interest that a taxpayer may deduct each year is $2,500.  The $2,500 limit is the same regardless of how may students are in the taxpayer’s family.

 What is a Qualified Education Loan?

A qualified education loan must be taken out to pay qualified higher education expenses (defined below) of the taxpayer, the taxpayer’s spouse, or any dependent of the
taxpayer at the time the debt was incurred to attend either:

  • an eligible education institution (generally a college, university, etc.)
  • an institution conducting internship or residency programs leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility conducting post graduate training

 What Are Qualified Higher Education Expenses

The qualified education loan must be used to pay qualified higher education expenses.  Qualified higher education expenses are generally the student’s cost of attending the educational institution, including tuition, fees, room and board, books, equipment, and related expenses.

To qualify as an education loan, the debt must be incurred solely to pay for qualifying educational expenses.  Mixed use loans do not qualify.  Revolving lines of credit generally will not qualify as a qualified higher education loan; however, if the line of credit funds are used solely to pay qualifying education expenses, the taxpayer may be able to certify the loan as a qualifying educational loan.

 Taxpayer Must Be Directly Liable on Loan

Only the taxpayer legally obligated to make interest payments under the terms of the loan can claim the student loan interest deduction.  Parents cannot, therefore, claim a deduction for interest on a student loan for which only their child is the borrower.  However, were a parent cosigns the loan, the parent and the child are jointly liable on the student loan and the parent is able to deduct the interest the parent paid on the student loan.

Cosigning the loan is required—acting as a guarantor on a student loan will not allow a parent to deduct interest payments on the loan.

Phase Outs

For 2014, the student loan interest deduction is phased out as modified AGI moves from $130,000 to $160,000 for joint filers and $65,000 to $80,000 for single and head of household filers.

If you have any questions on how this applies to you, please feel free to give us a call.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Repayment of the Premium Assistance Credit May Be Limited

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A premium assistance credit is available to certain taxpayers to help them pay their health insurance premiums.  Taxpayers do not have to wait until the end of the year when they file their tax returns to receive this credit.  The credit can be based on an estimate of the person’s income during the year.

If the taxpayer qualifies for advance payment of the premium assistance credit, the federal government will pay the amount of the credit directly to the insurance company, and the person will pay the balance of the premium.

 Income is defined as:

Adjusted Gross Income plus tax-exempt interest, plus non-taxable Social Security benefits, plus excluded foreign earned income. It is critical to note that the income of each family member must be included in the taxpayer’s income.  A taxpayer’s family includes the spouse and the individuals that the taxpayer claims as dependents.  When adding the family’s income to the taxpayer’s income, the taxpayer may no longer qualify for the credit.

 Actual Income Must be Reconciled with Estimated Income

When the taxpayer files her tax return for the year, the actual premium assistance credit will be calculated based on her actual income.  The credit amount based on actual income will be compared to the credit received during the year.  If the actual premium assistance credit is less than the advance premium assistance credit received during the year, the taxpayer will have to repay some or all of the credit.

 The Repayment Amount May be Limited

Fortunately, at the end of the year, if the taxpayer’s income is less than 400% of the federal poverty line, there is a limit on how much of the advance premium assistance credit will have to be repaid.  Unfortunately, I ran through some numbers and in many cases, taxpayers will still have to repay a substantial amount of the advance premium credit.  However, even if the limit can save the taxpayers a few hundred dollars, it is worth it.

The limit on the amount of the advance premium credit is based on filing status and income compared to the federal poverty line:

Household Income Relative to Federal Poverty Line

Married, Surviving Spouse, Heads of Household

Single Filers

Less than 200%

$600

$300

200% to 299%

$1,500

$750

300% to 399%

$2,500

$1,250

The amounts will be adjusted for inflation.

 Examples

 Example:  Tina is single and has a child.  She files Head of Household.  To claim the advance premium assistance credit, she estimates her income to be $30,000 (193% of the federal poverty line).  Based on this income, her premium assistance credit is $3,206 (based on an applicable benchmark plan annual premium of $5,000)..  When the year ends and she files her tax return, her actual income was $40,000.  Based on this amount of income, her premium assistance credit should have been $1,700.  Tina would have to repay $1,506 of the credit amount with her tax return filing.  However, since Tina files as Head of Household and her actual income is at 257% of the federal poverty line, the most that Tina will have to repay is $1,500.  The cap saved her $6.

Example 2:  Same facts as above except Tina’s actual income was $35,000.  Based on this amount of income, her premium assistance credit should have been $2,513.  Tina would have to repay $693 of the credit amount with her tax return filing.  Here, the repayment cap does not help her because the cap limits her repayment to $1,500, which is more than her actual repayment of $693.

Example 3:  Same facts as above except Tina’s actual income was $50,000.  Based on this amount of income, her premium assistance credit should have been $250.  Tina would have to repay $2,956.  However, since Tina files as Head of Household and her actual income is at 322% of the federal poverty line, the most that Tina will have to repay is $2,500.  The cap saved her $456.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.