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Can someone please explain student loan interest deduction, please?

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Can someone please explain student loan interest deduction, please?

Old 02-12-06, 09:45 PM
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Can someone please explain student loan interest deduction, please?

Just finished our income taxes for the year. The one thing that bugs me is how the gubbmint says that student loan interest paid in the year is deductible from federal taxes. Except, the limit is $2500 (I paid almost double this last year) and it doesn't seem to come back anywhere. I'm certainly not getting $2500 back in refunds. What am I not understanding? For that matter, how do charitable donations work into the refund?
Old 02-12-06, 09:52 PM
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they are all below the line deductions

The limit is $2500 of student loan interest with some income tests
Old 02-12-06, 09:56 PM
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Deductions in that section don't equate to you paying that much less in taxes. They lower your Adjusted Gross Income, which is eventually subject to a tax rate. For example, I'm deducting my tuition payment of about $2200 (the limit is $3000, IIRC), but that just means I'm paying $300 less in the end.
Old 02-12-06, 09:57 PM
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Old 02-12-06, 09:58 PM
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Originally Posted by al_bundy
they are all below the line deductions

The limit is $2500 of student loan interest with some income tests
What does that mean? What on earth is an income test? Let's pretend for just one moment that I'm completely stupid and need things to be outlined very clearly.
Old 02-12-06, 09:58 PM
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Originally Posted by kenny79
Deductions in that section don't equate to you paying that much less in taxes. They lower your Adjusted Gross Income, which is eventually subject to a tax rate. For example, I'm deducting my tuition payment of about $2200 (the limit is $3000, IIRC), but that just means I'm paying $300 less in the end.
Ahhhhhhhhhhh... ok.
Old 02-12-06, 10:03 PM
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Kenny is right. Same thing with mortgage interest. They just lower your taxable income.

Also, I think the income limit is like $75k -- so if you earn more than that, you can't write off any loans.
Old 02-12-06, 10:04 PM
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The interest is DEDUCTIBLE. You don't get the interest back. It merely goes into your itemized deductions (and only if you itemize, which you should do IF your itemized deductions are larger than your standard deduction).

In simpler language, the deductions reduce the amount of income that gets taxed. So the taxes you owe are reduced by the taxes due on the deductible amount (basically).

If you're this new at taxes and basic tax concepts, you might want to have someone go over your return, at the very least.
Old 02-13-06, 08:31 AM
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Originally Posted by drmoze
The interest is DEDUCTIBLE. You don't get the interest back. It merely goes into your itemized deductions (and only if you itemize, which you should do IF your itemized deductions are larger than your standard deduction).
This is not true. You get a portion back (depending on income level) regardless of whether you itemize or not.
Old 02-13-06, 09:40 AM
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Isn't student loan interest above the line?
Old 02-13-06, 10:09 AM
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you take your income and subtract things like 401k contributions, medical insurance, etc and you get Adjusted Gross Income or AGI. Than you either itemize or take a standard deduction and you get your taxable income.

Mortgage interest, charity, student loan interest and a bunch of others are below the line, meaning they are in the itemized part or below the AGI. With student loan interest the income limitation is $50,000 for single, $100,000 for married and than there is a formula to calculate how much you can deduct.

With below the line stuff the rule is generally you get back 25% in cash of what the actuall deduction is.
Old 02-13-06, 12:58 PM
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Originally Posted by al_bundy
you take your income and subtract things like 401k contributions, medical insurance, etc and you get Adjusted Gross Income or AGI. Than you either itemize or take a standard deduction and you get your taxable income.

Mortgage interest, charity, student loan interest and a bunch of others are below the line, meaning they are in the itemized part or below the AGI. With student loan interest the income limitation is $50,000 for single, $100,000 for married and than there is a formula to calculate how much you can deduct.

With below the line stuff the rule is generally you get back 25% in cash of what the actuall deduction is.
Just looked at my 2005 return and student loan interest comes out before AGI.
Old 02-13-06, 01:13 PM
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You can take a student loan interest deduction to your taxable income for up to $2500 in student loan interest paid. This is subject to income restrictions - if your modified adjusted gross income is over $65,000 (single) or 135,000 (married-joint), you can take no deduction, and if you make between $50k and $65k (single) or $105k-$135k (married - joint), you can only take a portion of the interest as a deduction. The student loan interest deduction can be taken whether you itemize or take the standard deduction.

See http://www.irs.gov/publications/p970/ch04.html

For charitable contributions, you have to itemize your deductions to realize the benefit. If you do, they reduce your federal taxable income. So, if you are in a 25% bracket, each dollar you claim as a charitable contribution will reduce your taxes by $0.25. There are some limits to how much you can contribute, but they probably don't apply to you. See http://www.irs.gov/charities/charita...134331,00.html.
Old 02-13-06, 07:26 PM
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Thanks, guys. This makes a whole lot more sense now.

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