Student Loan Tax Issues
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Related Resources
AAMC Documents
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Current Status
On May 21, 2008, the House passed the "Energy and Tax Extenders
Act of 2008" (H.R. 6049), which includes a one-year extension
(though December 31, 2008) of deductions for qualified tuition and
related expenses that expired December 31, 2007. Senate Finance
Committee Chair Max Baucus (D-Mont.) and Ranking Member Charles
Grassley (R-Iowa) introduced their own version of the tax extenders
bill that extends the tuition deductibility through December 31,
2009.
Background
Medical students may be eligible for tax benefits such as the Hope
and Lifetime Learning tax credits. Medical residents may qualify
to deduct up to $2,500 under the Student Loan Interest Deduction
(SLID) program.
Hope Tax Credit
The Hope Credit is a tax credit for college students in their first
two years of college. It provides a tax credit of up to $1,650 on
the first $2,200 of college tuition and fees. You can claim the
Hope Credit on your tax return if you, your spouse, or your dependent
are a first-year or second-year college student, is enrolled at
least half-time at an eligible education institution, and you were
responsible for paying college expenses.
Lifetime Learning Credit
The Lifetime Learning Credit is a tax credit for any person who
takes college classes. It provides a tax credit of up to $2,000
on the first $10,000 of college tuition and fees. You can claim
the Lifetime Learning Credit on your tax return if you, your spouse,
or your dependents are enrolled at an eligible educational institution
and you were responsible for paying college expenses. Unlike the
Hope Credit, you need not be enrolled at least half-time. Even if
you took only one class, you may take advantage of the Lifetime
Learning Credit.
Beginning in 2007, the amount of Hope or lifetime learning credit
is gradually reduced (phased out) if the modified adjusted gross
income (MAGI) is between $47, 000 and $57,000 ($94,000 and $114,000
for joint returns). Those with a MAGI of $57,000 or more ($114,000
for joint returns) cannot claim a credit.
Student Loan Interest Deduction
Current Internal Revenue Code (26 USC Sec. 221) allows for borrowers
to deduct up to $2,500 of interest paid on qualified student loans.
The maximum allowable deduction starts to phase out at gross incomes
greater than $50,000 ($100,000 for joint return), and a deduction
is not allowed for borrowers with gross income greater than $65,000
($130,000 for joint return). Furthermore, dependents are not eligible
for the student loan interest deduction, and other assistance, such
as employer contributions and scholarships, must be reduced from
the total costs incurred. The sunset provision for this amendment
indicates that deductions cannot be applied to taxable years after
December 31, 2010.
Congressional Activity
The Senate Finance Committee had hoped to introduce a comprehensive
education tax bill in the 110th Congress. Early discussions with
committee staff indicate that they plan to make permanent student
loan interest deductibility. The committee also has made it a priority
to exempt from taxable income the new public service loan forgiveness
program, passed under the "College Cost Reduction and Access
Act of 2007" (P.L. 110-84) see page 35. The committee has not
considered a tax exemption for the loan forgiveness provided after
25 years of participation in the income-based repayment program.
In the 109th Congress, the House of Representatives and the Senate
introduced a number of bills that propose changes to the current
Internal Revenue Code. Several House bills proposed to eliminate
the limit on the maximum allowable deduction under the SLID, while
a number of the Senate bills proposed a $1,500 credit to replace
the current deduction. Additionally, a number of bills have proposed
reinstating a 60-month limit, which would have prohibited the deduction
of interest on loans taken out 60 months prior to filling. Bills
in both the House and the Senate had phase outs between varying
gross incomes. A side by side chart of proposed legislation is available
under AAMC Documents.
AAMC Activity
The AAMC has endorsed Rep. Phil English's (R-Pa.) "Higher
Education Affordability and Equity Act of 2007" ( H.R. 1407).
This Bill proposes that the limitations on the maximum allowable
deduction be repealed, and increases the income levels that trigger
the eligibility phase out to between $100,000-$115,000 ($200,000-$230,000
for joint returns). Furthermore, the H.R. 1407 excludes amounts
received as part of a scholarship, fellowship or grant from taxable
income if used for qualified higher education expenses for undergraduate
and graduate students.
Contacts
Matthew Shick, Senior Legislative Analyst
AAMC Government Relations
mshick@aamc.org
(202) 862-6116
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