December 17, 2024 • 21 mins
In this episode of the Teaching Tax Flow podcast, hosts delve into the intricate relationship between student loans and taxes, a subject often misunderstood yet crucial. They explore the impact of student loans on financial planning and tax liabilities, dissecting significant elements such as the student loan interest deduction and loan forgiveness. The discussion is enriched by Chris Picciurro’s expert insights into strategies for managing student loans in conjunction with taxes.
Listeners will gain a comprehensive understanding of how student loan interest deductions work, emphasizing key points such as the distinction between above-the-line and itemized deductions. Chris provides critical analysis of the existing thresholds for income and their effects on deductibility for taxpayers. Moving into the second segment, the conversation pivots to student loan forgiveness, detailing changes brought by the American Rescue Plan Act and its implications for tax-free debt forgiveness. Finally, the episode introduces innovative updates from the Secure 2.0 Act on employer contributions toward student loans, opening up new avenues for employee benefits and financial planning.
Key Takeaways:
- The student loan interest deduction allows for a deduction of up to $2,500 annually, offering an above-the-line benefit but phasing out at certain income levels.
- The American Rescue Plan Act establishes temporary tax-free loan forgiveness from 2021 to 2025, significantly affecting individuals in forgiveness programs.
- Permanent exclusions allow certain professions, like public service workers and teachers, to benefit from tax-free forgiveness under specific conditions.
- The Secure 2.0 Act facilitates employer contributions to student loans in lieu of retirement fund contributions, promoting financial relief for employees.
- Careful planning around filing status could optimize student loan repayment strategies, aligning with income-based repayment and forgiveness goals.
Notable Quotes:
- "One of the rule changes was the forgiveness of student loan debt and the taxability of that." – Chris Picciurro
- "The IRS allows taxpayers to deduct up to $2,500 of interest paid on any qualifying student loan annually."
- "One of the reasons that you would file married separately has to do with student loan debt."
- "The American Rescue Plan Act of 2021 put a temporary exclusion for student loan debt forgiveness between the years of 2021 and 2025."
- "Employers now can contribute to student loan payments so instead of the employer funding a retirement plan contribution."
Resources:
- Teaching Tax Flow: Website
- Integrated Investment Group: Visit Website
- Defeating Taxes Facebook Group: Join Here
Episode Sponsor:
Integrated Investment Group
- (00:03) - Exploring Student Loans, Taxes, and Financial Implications
- (02:26) - Understanding the Student Loan Interest Deduction and Its Limitations
- (05:11) - Humorous Banter About Loan Eligibility and Borrower Requirements
- (05:59) - Student Loan Interest Deduction and Tax Filing Strategies
- (09:21) - Strategies for Managing Student Loan Repayments and Tax Deductions
- (10:32) - Tax-Free Student Loan Forgiveness Under American Rescue Plan
- (12:16) - The Perils of Attempting Cartwheels and Potential Injuries
- (13:25) - Tax-Free Student Loan Forgiveness for Public Service Workers
- (16:30) - Employers Can Contribute to Student Loans Instead of Retirement <
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Intro (00:03):
Welcome back to the teaching tax flow podcast,
everybody. Today, episode 114.We're gonna look at student
loans and taxes. So what thatmeans for you if you do have a
student loan, if you have ayoungster thinking about taking
1, we're gonna dive into it hereas a team, discuss with you some
of the, we call pros and cons ofthose, but, again, how it
(00:24):
relates to taxes. And before wedo that, though, let's take a
brief moment as always and thankour episode sponsor.
Ad Read (00:33):
Are you leaving money on the table? Are you an
accredited investor seeking newand exciting investment
opportunities? Look no furtherthan Integrated Investment
Group, your trusted partner infinancial success. At IIG, the
focus is on delivering exclusiveinvestment options tailored to
your unique needs and goals.Contact them today and let their
(00:54):
expert team guide you towardyour financial aspirations.
Wondering if you qualify as anaccredited investor? Wondering
if you qualify as an accreditedinvestor? Visit
teachingtaxflow.com backslash II g to find out and take the
first step towards a brighterfinancial future. Integrated
Investment Group. Your path tofinancial success begins here.
Securities offered through CabinSecurities. Member FINRA SIPC.
John Tripolsky (01:21):
Alright, everybody. Welcome back to the
podcast. As you heard in theintro, we're gonna talk about
student loans and how it relatesto taxes. Something that may may
not really click with me rightout of the gate. Right?
You think about it. Oh, wait. Ihave I have a loan student loan.
Maybe it's gonna get forgiven.Maybe.
Maybe not. You know? Does thathave to do anything with taxes?
(01:41):
Well, we're here. We're gonnatalk about this here in just a
moment, and welcome back to theshow as always.
Chris Picciurro. How's it going,my man?
Chris Picciurro (01:49):
It's going well. Thanks for asking. And
yeah. Well, this has been atopic that, you know, that gets
asked. As you may or may notknow, I have the honor of being
one of the, tax season updateinstructors for the National
Association of TaxProfessionals.
One of the rule changes was theforgiveness of student loan debt
(02:11):
and the taxability of that. Sowe're gonna talk about that in
the second part of the show, butwe're gonna start the show off
by talking about the studentloan interest deduction. The
student loan interest deductionis a, what we call in the
business, an above the linededuction. And that means that
it gets deducted before wecalculate your adjusted gross
(02:32):
income. And it allows taxpayersto take a a deduction for a
portion or all or a portion ofthe student loan interest that
they're paying.
Now remember, one of the laws ofteaching tax flow is that your
tax agencies are yourinvoluntary business partner.
Tax laws are in encourage anddiscourage certain behavior.
These could be financial,social. So what what are we
(02:54):
saying here is that in general,the federal government is is
pretty generous with givingstudent loans out to taxpayers.
They are somewhat generous aboutallowing you to deduct said
student loan interest.
This is one of those things thatthat I personally I usually
don't get into my personalopinions too much about things
(03:14):
here. Usually try to be ascoreboard. I personally feel
that it is, it could be a much,much more generous, deduction.
And it it's it falls into thatall hat, no cattle category for
me. And and what what that meansis that the vast majority of
people that are paying studentloan interest are either getting
(03:36):
phased out of the deduction ornot being able to deduct a good
portion of it.
And quite frankly, many of thepeople if you look at the
statistics, many of the peoplethat have have, have student
loan interest and have graduatedfrom a a higher institute, of
learning, like university orcollege, typically, in general,
(03:56):
will have a decent amount ofincome and give phase not even
taking this deduction. But let'stalk about it because it could
be helpful. And it is adeduction that I've seen get
missed. People just don't don'trealize it. So what is a
deduction?
Well, the IRS allows taxpayersto deduct up to $25100 of
(04:20):
interest paid on any qualifyingstudent loan annually. And I get
again, that's an adjustment toyour income. So it's this is
this deduction is better thanwhat we call an itemized
deduction. You can take thestandard deduction and still
qualify for the student loaninterest deduction.
John Tripolsky (04:36):
That's good to know. You know? Yeah. And,
basically, what you were sayingthere is you said a lot of
people just kinda tend to missthis, or when you say miss it,
they they sometimes forget thatthey can even deduct this. Is
that what what you meant bythat?
Chris Picciurro (04:50):
Absolutely. Yeah. They could forget they
they they even have thatopportunity. So what qualifies?
Well, you have to have a qualifyor how do you get the deduction?
You have to have a qualifiedloan. So the loan had to be
taken out for the purposes ofhigher education. John, when you
took that loan out and went andbought a Camaro, that doesn't
(05:10):
qualify. Sorry.
John Tripolsky (05:11):
Bummer. Oh, man. I was I was trying to think of
some smart smart remark. But,you know, you did pick a pretty
good car to use there as a, as afoe example. At least you didn't
say Well,
Chris Picciurro (05:21):
and I figured go
John Tripolsky (05:21):
buy a Honda Civic or something.
Chris Picciurro (05:23):
It had well, it had to be a GM car, John. There
you go.
John Tripolsky (05:26):
You you know well. You you know me well.
Chris Picciurro (05:28):
Yes. You have to be an eligible borrower
borrower ma'am, borrower. Goodgrief. That came out like a it's
a
John Tripolsky (05:37):
you're in the holiday spirit, my man. It's all
good.
Chris Picciurro (05:39):
That came out like a farthesturch,
John Tripolsky (05:41):
You got me. You have
Chris Picciurro (05:43):
to be eligible. I you know, if you don't you
don't qualify if the if theborrower borrower
John Tripolsky (05:49):
Come on, buddy. You got it. Is the one you're
saying. You gotta get out there.Yeah.
We're gonna have you know what?We're gonna have to send you
back to college, but we're gonnasend you back to the English
course.
Chris Picciurro (05:59):
We're gonna have a speech therapist over the
house, you know, later thisafternoon. You have to you have
to it has to be for educationaluse, like we said, and married
taxpayers filing filingseparately cannot take the
deduction. Now that seems like,man, that the IRS is really
being a meanie, aren't they?There's a reason. The reason is
(06:20):
that there are phase outs due toincome, and so you can't take
the deduction if you're filingmarried separately.
And like I said, there areincome thresholds. We're gonna
talk about that next because Ifeel like they should be more
generous. So I think the IRS isbeing a meanie when it comes to
these thrust. It's actually notthe IRS. It's the it's the
federal government.
(06:40):
The IRS is just the policeforce. You know, they don't they
don't make the laws.
John Tripolsky (06:45):
Right. Right. And I know this topic just as a
whole here, you know, as we talkabout, you know, the
relationship of student loansand tax. There's not a whole lot
of which we we won't say there'snot a whole lot of meat on this,
but this really isn't a a 30 ora 45 minute discussion on this
because a lot of it's it'spretty straightforward for the
most part. Right?
Like, there's it's not like wecan go off and do a lot of
(07:06):
theories and concepts and allthis stuff. There's there's a
limited amount of informationout there on this, should we
say.
Chris Picciurro (07:13):
Correct. So when does this phase out occur?
I'm gonna talk about the 2023tax year. I know we're in we're
in 2024, but we just finishedfiling season for 23 with
extensions. The phase out startsfor single taxpayers at $75,000
of adjusted gross income,155,000 for married filing
(07:35):
joint.
The deduction is completelyphased out if your adjusted
gross income for a single personexceeds 90,000 and185 for
married joint. So if you are asingle taxpayer and make $90,000
or more of adjust your grossincome, you're on Santa's bad
list when it comes to studentloan interest deduction, and you
(07:55):
get nothing. If you're between7590, you get a portion. And if
you're under 75, you get up to$25100 per year of student loan
interest. And, again, same forthe married jointly, it's 155
and and 185.
I think that that, again, Ithink those threshold phase
outs, and I'm not the only one,are not very generous. Now it'd
(08:19):
be remiss if I didn't mentionthis. This is a different topic
when we talk about filing statusand when you in in there are
some unique situations where youwould be better off filing
married joint or marriedseparate than married jointly.
One of the reasons that youwould file married separately
has to do with student loandebt. It doesn't have to do with
(08:42):
a student loan interestdeduction, but many student loan
debt repayment schedules arebased on your income.
So if you are filing jointly,that takes into account your
spouse's income instead of justyour income. So there are times
where you might wanna file veryjointly to make sure that your
(09:04):
debt repayment or your studentloan repayment, monthly payment
is either exempt or 0 or very,very low. And that kind of plays
a role in our second thing we'regonna talk about, but I would be
remiss if I said if I didn'tmention that part of it.
John Tripolsky (09:23):
Makes total sense. Makes total sense. And,
yes, as we kinda go throughthis, right, like, it's it is
interesting. And and back towhat you said before is, like,
people sometimes even forgetabout it. Maybe it's, you know,
they made say they got out ofschool.
They had a good opportunity.They made a bunch of money and
maybe there was a career shift.Maybe now they're below that
threshold. Right. So that's andI imagine that kind of resets
(09:45):
itself, obviously based yearover year, not the, you know,
the year that you started anyrepayment program as far as for
taking that as a as a deduction.
So
Chris Picciurro (09:56):
Actually, that's a great point, John.
There is no look back period.There are some things that I
have a look, but for instance,when we talked about that, the,
the the clean vehicle credit forindividuals, there's a look back
period where you can there's anincome threshold and you can
either factor in your previousyear's tax or the tax year of
the purchase of of a vehicle.For this, there's no look back
(10:20):
period. And that's why I'msaying is a lot of people that
have student loan debt interestare actually paying, are making
money in excess of thethreshold.
So they don't The theultimately, the whole student
loan interest is now a personalexpense. Now I talked about
sometimes you the filing yourfiling status could affect how
(10:42):
much your payment your paybackis. Ultimately, you're gonna
have to pay your student loaninterest back or your student
loan debt anyway in general, butthere are some new there are
some relatively new rules underthe American Rescue Plan Act of
2021 that allows for forforgiven student loan debt to be
tax free. That so if you thinkyou're going down the path where
(11:05):
your student loan debt's gonnabe forgiven, you wanna lower the
amount of repayment. Right?
Who wants to when and and thatcomes down to tax planning and
filing status. In general, anyforgiveness of debt is
considered taxable income. Sothat's your default. However,
this American Rescue Plan Act of2021 put a temporary exclusion
(11:29):
for student loan debtforgiveness between the years of
2021 2025. So on in thissituation, loans forgiven under
most federal or privateforgiveness programs are not
included in taxable income.
And this provision applies toboth federal student loans and
private educational loans,assuming that the forgiveness
(11:49):
meets the program requirements.So we're gonna talk about the
what those requirements are. Butit so if if you have a student
loan debt that got forgivenbetween 21 and and coming up
here into 2025, you might bescot free. You might say, look,
not only do I not have to paythe student loan back, I don't
have to pay tax on that debtforgiveness or cancellation of
(12:13):
debt, it's called.
John Tripolsky (12:14):
So that's like 2 high fives.
Chris Picciurro (12:16):
It's a double high five. It's almost a
cartwheel. Right.
John Tripolsky (12:19):
Yeah. Perfect.
Chris Picciurro (12:20):
You don't if you look. You don't wanna see
either one of us try to do acartwheel.
John Tripolsky (12:26):
No. No. That it would it would be a bad
situation.
Chris Picciurro (12:30):
It would be very bad, and it'd probably be
an injury. We'd probably we'dprobably be in physical therapy.
So not only would I have aspeech therapist coming over
here, I'd also have someonecoming over to help me move
around.
John Tripolsky (12:40):
Right. Oh. Oh, boy. Oh, boy.
Chris Picciurro (12:45):
So and then so under the American Rescue Plan
Act, there are some permanentexclusions for certain programs
as well. So that temporaryexclusion is from 21 to 25 for
student loan debt forgivenessbeing taxable. Okay? But the
American Rescue Plan said, youknow what? We need we need some
people in certain industries.
(13:07):
Remember, tax laws are writtento encourage and discourage
certain behavior. So we needsome people in some industries,
and we're gonna we're gonna say,you know what? We're gonna we're
gonna make that student loandebt, forgiven and tax free if
if you meet one of theseexclusions. And those exclusions
are gonna be public service loanforgiveness. So public service
(13:32):
loan forgiveness, is not taxableif the loan is forgiven, but
they require the borrowers tomake a 120 qualifying payments
while employed full time in aneligible public service job,
like government or nonprofitrole.
So that's what I'm that's whyyou you might wanna file let's
say you're married you gotmarried, you might wanna file
(13:53):
separately to keep thosepayments really low. Ultimately,
let's say you work for in a in agovernment service job or you
work at a nonprofit. Okay. Ifyou have a student loan debt and
you make your payments for 10years, whatever you owe at the,
after that 10 years could be forbasically forgiven and tax free
(14:13):
under this public service loanforgiveness program. So that's
pretty generous, especially forso because we do need more
people in public service jobs,in government, and in nonprofit
roles.
John Tripolsky (14:25):
Right. Right. And for that one, I guess, kind
of an odd question maybe is soeven though so oh, I see it
actually. Now looking back atour note a little bit where you
had mentioned it was previousexclusions or I'm sorry, a
permanent exclusion. So thisdoesn't fall into that between
21 and 25.
So this is something that movingforward. I see. We actually
(14:45):
wrote that down here.
Chris Picciurro (14:46):
Yeah. Yes. And I was unclear a little bit. So
the our American Rescue Plangave us that temporary exclusion
for student loan debtforgiveness, but these are
permanent. So really nice forthe public service loan
forgiveness.
There's Absolutely. Teacher loanforgiveness. So teachers in low
income schools that meet certaincriteria can qualify for
forgiveness up to $17,500.Again, their loan let's say they
(15:10):
have a student loan for $35,000and it gets completely forgiven.
A teacher in a qual in a lowincome school that meets the
criteria.
70 $17,500 of that would be taxfree. The other amount would be
taxable, but, hey, I'd ratherpay the tax on $17,500 than pay
it all back. Right? And youmight be at a lower marginal tax
(15:34):
rate. If student loan balancesforgiven due to borrower's death
or permanent disability are nowexcluded from taxable income as
well.
So that's that and that makessense. Right? I mean, what
happens if you, god forbid, youhave you you you have a student
loan debt and you start workingand something happens where
(15:54):
you're you're permanentlydisabled. You can't work
anymore. You really can't earnincome to pay the student loan
back that would be forgiven inin in tax free.
So those are things to thinkabout when you when you're
talking to in playing doing taxplanning, even financial
planning to an extent for foryounger, let's say, not just
(16:15):
younger, but taxpayers that arejust getting out of school,
getting into the workforce, planand, you know, their student
loan debt could be more than amortgage. Right? Especially what
if they went to law school ormedical school. So there are a
lot of planning has to beinvolved when it comes to that.
And I have one more little funthing to sprinkle into this,
(16:38):
conversation before we
John Tripolsky (16:40):
What you got?
Chris Picciurro (16:40):
What you think?
John Tripolsky (16:41):
Boy on. So
Chris Picciurro (16:45):
under this so now we're gonna shift gears.
It's related to student loans,but not necessarily the student
loan interest deduction. But I Ifeel that we'd be remiss without
mentioning that. Under the secso what do we know? We know that
a lot of younger people are notcontributing enough to their
retirement plan.
We know that the secure 2.0 actwas enacted to make to allow
(17:08):
more money to be contributed toretirement plans because, one,
the Social Security Fund,there's concerns about that. And
just in general, people aren'tfunding their own retirement
plan as much. So one of thethings that secure 2.0 acted,
2.0, there was a secure act of2019. This secure 2.0 act came
in in 2022, but employers nowcan contribute to student loan
(17:34):
payments. So instead of theemployer funding a a retirement
plan contribution, employers canmake retirement plan
contributions on behalf ofemployees who are repaying
student loans.
So it could help. So theemployer can, instead of
contributing to retirement plan,put the employer contribution in
(17:56):
into paying off a student loan.
John Tripolsky (17:58):
Interesting. Interesting.
Chris Picciurro (18:00):
Yeah. And and it can you know, I I've yet to
see this actually happen. Butbut, again, it's it's out there.
And that started here in 2024.
John Tripolsky (18:12):
And, honestly, I haven't even heard of that
either. So that's, you had somenews right there. Interesting.
Chris Picciurro (18:18):
And it and it, ultimately, it helps, you know,
it helps with employeeretention. It helps the it take
the burden, you know, becauseagain, that that student loan
repayment monthly monthlyrepayment amount could be really
a significant amount of us of ofsomeone's, you know,
discretionary income. So if youhave a if you have a new team
(18:41):
member and the employer says,hey. I wanna put money in your
retirement plan. The the theemployee might say, you know
what?
It'd be really much more helpfulfor you to to pay some of my
student loan payments.
John Tripolsky (18:53):
Yeah. And I'm sure yeah. I think it's like you
mentioned, I'm sure some peoplereally that's very beneficial.
I'm on both sides of the fence.
Chris Picciurro (19:00):
Exactly. So if you have an employer, if you're
an employer or you you know, youknow and and you have you think
this might be helpful, justreach out to your tax
professional or jump into thedefeating taxes private Facebook
group, and we'll help guide youin the right direction.
John Tripolsky (19:16):
Awesome. Awesome. Well, everybody, I know
we're, you know, we're kind ofinching towards the end of the
year, obviously, right inbetween this little sweet spot
of the holidays. So just wantedto get this one out there as
well as and, I was just lookingat this too, Chris, as as you
were chatting a little bit juston our kind of our topic
schedule for 25. So I know wegot some good stuff on there,
and we're always looking forideas.
(19:37):
So if you guys have some sometopic suggestions as we
mentioned, you know, a littlebit more than most on the last
episode that we did, shoot themover to us. We'd we'd love to
hear them. Worst case scenario,they might not happen next week,
but we could change up ourschedule a little bit. We could
adjust. And, you know, as thingscome up, we usually like to
address them as quick aspossible while they're relevant.
So that way, you know, you don'thave to necessarily search
(20:00):
through Google for information.You could just subscribe to the
podcast. Little little humble,humble brag there. We tend to be
a little bit more credible thana Google search. So just say
just saying what's true.
But definitely check us out ifyou haven't yet. Again,
subscribe to the podcast. Checkus out. Subscribe to our YouTube
channel, in defeating taxes. Sodefeating taxes.com, that will
actually take you direct to thatprivate Facebook group you are
(20:22):
invited to, so you can't say wedidn't send you a present.
Sure. We didn't wrap it up. Wedidn't deliver it to you under
your tree, but that's yourinvite, defeating taxes.com.
We'll get you in that group. Soas always, this one is a little
bit shorter, though, than most,but we'll see you back here
again on the Teaching Tax Wellpodcast next week, different
(20:43):
time and per our schedule.
Completely, completely differenttopic. So have a great rest of
the year, everybody, and butwe'll see you here next week.
Have a good one.
Disclaimer (20:53):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough cabin advisors, a
registered investment advisor.
Securities are offered throughCabin Securities, a registered
broker dealer. The content ofthis podcast does not constitute
(21:14):
an offer of securities.Offerings can only be made
through an offering memorandumand you should carefully examine
the risk factors and otherinformation contained in the
memorandum.
Welcome back to the teaching tax flow podcast,
everybody. Today, episode 114.We're gonna look at student
loans and taxes. So what thatmeans for you if you do have a
student loan, if you have ayoungster thinking about taking
1, we're gonna dive into it hereas a team, discuss with you some
of the, we call pros and cons ofthose, but, again, how it
(00:24):
relates to taxes. And before wedo that, though, let's take a
brief moment as always and thankour episode sponsor.
Ad Read (00:33):
Are you leaving money on the table? Are you an
accredited investor seeking newand exciting investment
opportunities? Look no furtherthan Integrated Investment
Group, your trusted partner infinancial success. At IIG, the
focus is on delivering exclusiveinvestment options tailored to
your unique needs and goals.Contact them today and let their
(00:54):
expert team guide you towardyour financial aspirations.
Wondering if you qualify as anaccredited investor? Wondering
if you qualify as an accreditedinvestor? Visit
teachingtaxflow.com backslash II g to find out and take the
first step towards a brighterfinancial future. Integrated
Investment Group. Your path tofinancial success begins here.
Securities offered through CabinSecurities. Member FINRA SIPC.
John Tripolsky (01:21):
Alright, everybody. Welcome back to the
podcast. As you heard in theintro, we're gonna talk about
student loans and how it relatesto taxes. Something that may may
not really click with me rightout of the gate. Right?
You think about it. Oh, wait. Ihave I have a loan student loan.
Maybe it's gonna get forgiven.Maybe.
Maybe not. You know? Does thathave to do anything with taxes?
(01:41):
Well, we're here. We're gonnatalk about this here in just a
moment, and welcome back to theshow as always.
Chris Picciurro. How's it going,my man?
Chris Picciurro (01:49):
It's going well. Thanks for asking. And
yeah. Well, this has been atopic that, you know, that gets
asked. As you may or may notknow, I have the honor of being
one of the, tax season updateinstructors for the National
Association of TaxProfessionals.
One of the rule changes was theforgiveness of student loan debt
(02:11):
and the taxability of that. Sowe're gonna talk about that in
the second part of the show, butwe're gonna start the show off
by talking about the studentloan interest deduction. The
student loan interest deductionis a, what we call in the
business, an above the linededuction. And that means that
it gets deducted before wecalculate your adjusted gross
(02:32):
income. And it allows taxpayersto take a a deduction for a
portion or all or a portion ofthe student loan interest that
they're paying.
Now remember, one of the laws ofteaching tax flow is that your
tax agencies are yourinvoluntary business partner.
Tax laws are in encourage anddiscourage certain behavior.
These could be financial,social. So what what are we
(02:54):
saying here is that in general,the federal government is is
pretty generous with givingstudent loans out to taxpayers.
They are somewhat generous aboutallowing you to deduct said
student loan interest.
This is one of those things thatthat I personally I usually
don't get into my personalopinions too much about things
(03:14):
here. Usually try to be ascoreboard. I personally feel
that it is, it could be a much,much more generous, deduction.
And it it's it falls into thatall hat, no cattle category for
me. And and what what that meansis that the vast majority of
people that are paying studentloan interest are either getting
(03:36):
phased out of the deduction ornot being able to deduct a good
portion of it.
And quite frankly, many of thepeople if you look at the
statistics, many of the peoplethat have have, have student
loan interest and have graduatedfrom a a higher institute, of
learning, like university orcollege, typically, in general,
(03:56):
will have a decent amount ofincome and give phase not even
taking this deduction. But let'stalk about it because it could
be helpful. And it is adeduction that I've seen get
missed. People just don't don'trealize it. So what is a
deduction?
Well, the IRS allows taxpayersto deduct up to $25100 of
(04:20):
interest paid on any qualifyingstudent loan annually. And I get
again, that's an adjustment toyour income. So it's this is
this deduction is better thanwhat we call an itemized
deduction. You can take thestandard deduction and still
qualify for the student loaninterest deduction.
John Tripolsky (04:36):
That's good to know. You know? Yeah. And,
basically, what you were sayingthere is you said a lot of
people just kinda tend to missthis, or when you say miss it,
they they sometimes forget thatthey can even deduct this. Is
that what what you meant bythat?
Chris Picciurro (04:50):
Absolutely. Yeah. They could forget they
they they even have thatopportunity. So what qualifies?
Well, you have to have a qualifyor how do you get the deduction?
You have to have a qualifiedloan. So the loan had to be
taken out for the purposes ofhigher education. John, when you
took that loan out and went andbought a Camaro, that doesn't
(05:10):
qualify. Sorry.
John Tripolsky (05:11):
Bummer. Oh, man. I was I was trying to think of
some smart smart remark. But,you know, you did pick a pretty
good car to use there as a, as afoe example. At least you didn't
say Well,
Chris Picciurro (05:21):
and I figured go
John Tripolsky (05:21):
buy a Honda Civic or something.
Chris Picciurro (05:23):
It had well, it had to be a GM car, John. There
you go.
John Tripolsky (05:26):
You you know well. You you know me well.
Chris Picciurro (05:28):
Yes. You have to be an eligible borrower
borrower ma'am, borrower. Goodgrief. That came out like a it's
a
John Tripolsky (05:37):
you're in the holiday spirit, my man. It's all
good.
Chris Picciurro (05:39):
That came out like a farthesturch,
John Tripolsky (05:41):
You got me. You have
Chris Picciurro (05:43):
to be eligible. I you know, if you don't you
don't qualify if the if theborrower borrower
John Tripolsky (05:49):
Come on, buddy. You got it. Is the one you're
saying. You gotta get out there.Yeah.
We're gonna have you know what?We're gonna have to send you
back to college, but we're gonnasend you back to the English
course.
Chris Picciurro (05:59):
We're gonna have a speech therapist over the
house, you know, later thisafternoon. You have to you have
to it has to be for educationaluse, like we said, and married
taxpayers filing filingseparately cannot take the
deduction. Now that seems like,man, that the IRS is really
being a meanie, aren't they?There's a reason. The reason is
(06:20):
that there are phase outs due toincome, and so you can't take
the deduction if you're filingmarried separately.
And like I said, there areincome thresholds. We're gonna
talk about that next because Ifeel like they should be more
generous. So I think the IRS isbeing a meanie when it comes to
these thrust. It's actually notthe IRS. It's the it's the
federal government.
(06:40):
The IRS is just the policeforce. You know, they don't they
don't make the laws.
John Tripolsky (06:45):
Right. Right. And I know this topic just as a
whole here, you know, as we talkabout, you know, the
relationship of student loansand tax. There's not a whole lot
of which we we won't say there'snot a whole lot of meat on this,
but this really isn't a a 30 ora 45 minute discussion on this
because a lot of it's it'spretty straightforward for the
most part. Right?
Like, there's it's not like wecan go off and do a lot of
(07:06):
theories and concepts and allthis stuff. There's there's a
limited amount of informationout there on this, should we
say.
Chris Picciurro (07:13):
Correct. So when does this phase out occur?
I'm gonna talk about the 2023tax year. I know we're in we're
in 2024, but we just finishedfiling season for 23 with
extensions. The phase out startsfor single taxpayers at $75,000
of adjusted gross income,155,000 for married filing
(07:35):
joint.
The deduction is completelyphased out if your adjusted
gross income for a single personexceeds 90,000 and185 for
married joint. So if you are asingle taxpayer and make $90,000
or more of adjust your grossincome, you're on Santa's bad
list when it comes to studentloan interest deduction, and you
(07:55):
get nothing. If you're between7590, you get a portion. And if
you're under 75, you get up to$25100 per year of student loan
interest. And, again, same forthe married jointly, it's 155
and and 185.
I think that that, again, Ithink those threshold phase
outs, and I'm not the only one,are not very generous. Now it'd
(08:19):
be remiss if I didn't mentionthis. This is a different topic
when we talk about filing statusand when you in in there are
some unique situations where youwould be better off filing
married joint or marriedseparate than married jointly.
One of the reasons that youwould file married separately
has to do with student loandebt. It doesn't have to do with
(08:42):
a student loan interestdeduction, but many student loan
debt repayment schedules arebased on your income.
So if you are filing jointly,that takes into account your
spouse's income instead of justyour income. So there are times
where you might wanna file veryjointly to make sure that your
(09:04):
debt repayment or your studentloan repayment, monthly payment
is either exempt or 0 or very,very low. And that kind of plays
a role in our second thing we'regonna talk about, but I would be
remiss if I said if I didn'tmention that part of it.
John Tripolsky (09:23):
Makes total sense. Makes total sense. And,
yes, as we kinda go throughthis, right, like, it's it is
interesting. And and back towhat you said before is, like,
people sometimes even forgetabout it. Maybe it's, you know,
they made say they got out ofschool.
They had a good opportunity.They made a bunch of money and
maybe there was a career shift.Maybe now they're below that
threshold. Right. So that's andI imagine that kind of resets
(09:45):
itself, obviously based yearover year, not the, you know,
the year that you started anyrepayment program as far as for
taking that as a as a deduction.
So
Chris Picciurro (09:56):
Actually, that's a great point, John.
There is no look back period.There are some things that I
have a look, but for instance,when we talked about that, the,
the the clean vehicle credit forindividuals, there's a look back
period where you can there's anincome threshold and you can
either factor in your previousyear's tax or the tax year of
the purchase of of a vehicle.For this, there's no look back
(10:20):
period. And that's why I'msaying is a lot of people that
have student loan debt interestare actually paying, are making
money in excess of thethreshold.
So they don't The theultimately, the whole student
loan interest is now a personalexpense. Now I talked about
sometimes you the filing yourfiling status could affect how
(10:42):
much your payment your paybackis. Ultimately, you're gonna
have to pay your student loaninterest back or your student
loan debt anyway in general, butthere are some new there are
some relatively new rules underthe American Rescue Plan Act of
2021 that allows for forforgiven student loan debt to be
tax free. That so if you thinkyou're going down the path where
(11:05):
your student loan debt's gonnabe forgiven, you wanna lower the
amount of repayment. Right?
Who wants to when and and thatcomes down to tax planning and
filing status. In general, anyforgiveness of debt is
considered taxable income. Sothat's your default. However,
this American Rescue Plan Act of2021 put a temporary exclusion
(11:29):
for student loan debtforgiveness between the years of
2021 2025. So on in thissituation, loans forgiven under
most federal or privateforgiveness programs are not
included in taxable income.
And this provision applies toboth federal student loans and
private educational loans,assuming that the forgiveness
(11:49):
meets the program requirements.So we're gonna talk about the
what those requirements are. Butit so if if you have a student
loan debt that got forgivenbetween 21 and and coming up
here into 2025, you might bescot free. You might say, look,
not only do I not have to paythe student loan back, I don't
have to pay tax on that debtforgiveness or cancellation of
(12:13):
debt, it's called.
John Tripolsky (12:14):
So that's like 2 high fives.
Chris Picciurro (12:16):
It's a double high five. It's almost a
cartwheel. Right.
John Tripolsky (12:19):
Yeah. Perfect.
Chris Picciurro (12:20):
You don't if you look. You don't wanna see
either one of us try to do acartwheel.
John Tripolsky (12:26):
No. No. That it would it would be a bad
situation.
Chris Picciurro (12:30):
It would be very bad, and it'd probably be
an injury. We'd probably we'dprobably be in physical therapy.
So not only would I have aspeech therapist coming over
here, I'd also have someonecoming over to help me move
around.
John Tripolsky (12:40):
Right. Oh. Oh, boy. Oh, boy.
Chris Picciurro (12:45):
So and then so under the American Rescue Plan
Act, there are some permanentexclusions for certain programs
as well. So that temporaryexclusion is from 21 to 25 for
student loan debt forgivenessbeing taxable. Okay? But the
American Rescue Plan said, youknow what? We need we need some
people in certain industries.
(13:07):
Remember, tax laws are writtento encourage and discourage
certain behavior. So we needsome people in some industries,
and we're gonna we're gonna say,you know what? We're gonna we're
gonna make that student loandebt, forgiven and tax free if
if you meet one of theseexclusions. And those exclusions
are gonna be public service loanforgiveness. So public service
(13:32):
loan forgiveness, is not taxableif the loan is forgiven, but
they require the borrowers tomake a 120 qualifying payments
while employed full time in aneligible public service job,
like government or nonprofitrole.
So that's what I'm that's whyyou you might wanna file let's
say you're married you gotmarried, you might wanna file
(13:53):
separately to keep thosepayments really low. Ultimately,
let's say you work for in a in agovernment service job or you
work at a nonprofit. Okay. Ifyou have a student loan debt and
you make your payments for 10years, whatever you owe at the,
after that 10 years could be forbasically forgiven and tax free
(14:13):
under this public service loanforgiveness program. So that's
pretty generous, especially forso because we do need more
people in public service jobs,in government, and in nonprofit
roles.
John Tripolsky (14:25):
Right. Right. And for that one, I guess, kind
of an odd question maybe is soeven though so oh, I see it
actually. Now looking back atour note a little bit where you
had mentioned it was previousexclusions or I'm sorry, a
permanent exclusion. So thisdoesn't fall into that between
21 and 25.
So this is something that movingforward. I see. We actually
(14:45):
wrote that down here.
Chris Picciurro (14:46):
Yeah. Yes. And I was unclear a little bit. So
the our American Rescue Plangave us that temporary exclusion
for student loan debtforgiveness, but these are
permanent. So really nice forthe public service loan
forgiveness.
There's Absolutely. Teacher loanforgiveness. So teachers in low
income schools that meet certaincriteria can qualify for
forgiveness up to $17,500.Again, their loan let's say they
(15:10):
have a student loan for $35,000and it gets completely forgiven.
A teacher in a qual in a lowincome school that meets the
criteria.
70 $17,500 of that would be taxfree. The other amount would be
taxable, but, hey, I'd ratherpay the tax on $17,500 than pay
it all back. Right? And youmight be at a lower marginal tax
(15:34):
rate. If student loan balancesforgiven due to borrower's death
or permanent disability are nowexcluded from taxable income as
well.
So that's that and that makessense. Right? I mean, what
happens if you, god forbid, youhave you you you have a student
loan debt and you start workingand something happens where
(15:54):
you're you're permanentlydisabled. You can't work
anymore. You really can't earnincome to pay the student loan
back that would be forgiven inin in tax free.
So those are things to thinkabout when you when you're
talking to in playing doing taxplanning, even financial
planning to an extent for foryounger, let's say, not just
(16:15):
younger, but taxpayers that arejust getting out of school,
getting into the workforce, planand, you know, their student
loan debt could be more than amortgage. Right? Especially what
if they went to law school ormedical school. So there are a
lot of planning has to beinvolved when it comes to that.
And I have one more little funthing to sprinkle into this,
(16:38):
conversation before we
John Tripolsky (16:40):
What you got?
Chris Picciurro (16:40):
What you think?
John Tripolsky (16:41):
Boy on. So
Chris Picciurro (16:45):
under this so now we're gonna shift gears.
It's related to student loans,but not necessarily the student
loan interest deduction. But I Ifeel that we'd be remiss without
mentioning that. Under the secso what do we know? We know that
a lot of younger people are notcontributing enough to their
retirement plan.
We know that the secure 2.0 actwas enacted to make to allow
(17:08):
more money to be contributed toretirement plans because, one,
the Social Security Fund,there's concerns about that. And
just in general, people aren'tfunding their own retirement
plan as much. So one of thethings that secure 2.0 acted,
2.0, there was a secure act of2019. This secure 2.0 act came
in in 2022, but employers nowcan contribute to student loan
(17:34):
payments. So instead of theemployer funding a a retirement
plan contribution, employers canmake retirement plan
contributions on behalf ofemployees who are repaying
student loans.
So it could help. So theemployer can, instead of
contributing to retirement plan,put the employer contribution in
(17:56):
into paying off a student loan.
John Tripolsky (17:58):
Interesting. Interesting.
Chris Picciurro (18:00):
Yeah. And and it can you know, I I've yet to
see this actually happen. Butbut, again, it's it's out there.
And that started here in 2024.
John Tripolsky (18:12):
And, honestly, I haven't even heard of that
either. So that's, you had somenews right there. Interesting.
Chris Picciurro (18:18):
And it and it, ultimately, it helps, you know,
it helps with employeeretention. It helps the it take
the burden, you know, becauseagain, that that student loan
repayment monthly monthlyrepayment amount could be really
a significant amount of us of ofsomeone's, you know,
discretionary income. So if youhave a if you have a new team
(18:41):
member and the employer says,hey. I wanna put money in your
retirement plan. The the theemployee might say, you know
what?
It'd be really much more helpfulfor you to to pay some of my
student loan payments.
John Tripolsky (18:53):
Yeah. And I'm sure yeah. I think it's like you
mentioned, I'm sure some peoplereally that's very beneficial.
I'm on both sides of the fence.
Chris Picciurro (19:00):
Exactly. So if you have an employer, if you're
an employer or you you know, youknow and and you have you think
this might be helpful, justreach out to your tax
professional or jump into thedefeating taxes private Facebook
group, and we'll help guide youin the right direction.
John Tripolsky (19:16):
Awesome. Awesome. Well, everybody, I know
we're, you know, we're kind ofinching towards the end of the
year, obviously, right inbetween this little sweet spot
of the holidays. So just wantedto get this one out there as
well as and, I was just lookingat this too, Chris, as as you
were chatting a little bit juston our kind of our topic
schedule for 25. So I know wegot some good stuff on there,
and we're always looking forideas.
(19:37):
So if you guys have some sometopic suggestions as we
mentioned, you know, a littlebit more than most on the last
episode that we did, shoot themover to us. We'd we'd love to
hear them. Worst case scenario,they might not happen next week,
but we could change up ourschedule a little bit. We could
adjust. And, you know, as thingscome up, we usually like to
address them as quick aspossible while they're relevant.
So that way, you know, you don'thave to necessarily search
(20:00):
through Google for information.You could just subscribe to the
podcast. Little little humble,humble brag there. We tend to be
a little bit more credible thana Google search. So just say
just saying what's true.
But definitely check us out ifyou haven't yet. Again,
subscribe to the podcast. Checkus out. Subscribe to our YouTube
channel, in defeating taxes. Sodefeating taxes.com, that will
actually take you direct to thatprivate Facebook group you are
(20:22):
invited to, so you can't say wedidn't send you a present.
Sure. We didn't wrap it up. Wedidn't deliver it to you under
your tree, but that's yourinvite, defeating taxes.com.
We'll get you in that group. Soas always, this one is a little
bit shorter, though, than most,but we'll see you back here
again on the Teaching Tax Wellpodcast next week, different
(20:43):
time and per our schedule.
Completely, completely differenttopic. So have a great rest of
the year, everybody, and butwe'll see you here next week.
Have a good one.
Disclaimer (20:53):
The content provided is for educational purposes
only. We encourage you to seekpersonalized investment advice
from your financialprofessional. For all tax and
legal advice, please consultyour CPA or attorney. Investment
advisory services are offeredthrough cabin advisors, a
registered investment advisor.
Securities are offered throughCabin Securities, a registered
broker dealer. The content ofthis podcast does not constitute
(21:14):
an offer of securities.Offerings can only be made
through an offering memorandumand you should carefully examine
the risk factors and otherinformation contained in the
memorandum.
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