I have a love/hate relationships with student loans. I love that they allowed me to go to college and law school – I couldn’t have done it otherwise. But I hate almost everything else about them. And as a tax attorney with two graduate degrees, I find it impossible to read my own loan statements – there’s something horribly wrong with that picture.
Every year, I get a stack of forms 1098-E which detail the amount of interest that I pay to the various agencies which own me administer my loans. I take some solace in the fact that, in theory, I can deduct some of the student interest. If you pay interest on a qualified student loan, you might be able to deduct it, too. And the best part? The student loan interest deduction is treated as adjustment to income on your form 1040 so you don’t even need to itemize to claim it.
So what are the criteria?
1, You pay qualified student loan interest (meaning a loan used solely to pay qualified higher education expenses) during the year;
2, Your filing status is not married filing separately;
3, Your modified adjusted gross income is less than $70,000 ($145,000 if filing jointly); AND
4, You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s return.
Phaseouts and restrictions apply. So be sure and read the fine print.
And, if your student loan is canceled, in addition to some serious grief, you may have include the amount of the loan in income, unless an exemption applies (such as, for example, a service based cancellation).
Fix the Tax Code Friday is back! This is your chance to sound off about tax policy – and propose how you would fix the Tax Code if you were in charge…
One of the heavily criticized pieces of the economic bailout package is the extension of the debt forgiveness exemptions for mortgage cancellations. Here’s how it works: traditionally, debt that is forgiven is taxable to the recipient as income to the extent of the forgiven debt. For example, if I owe the bank $1000 and I only pay $100 and the bank “forgives” the remainder, that $900 difference is taxable to me as income.
The idea behind treating forgiven debt as income is that not having to pay a debt that is owed is sort of like receiving a check for that amount. That $900 in the example above? It was a liability on my balance sheet which would have been paid off with income (or other assets). Moving it to “zero” has to be accounted for somehow; the answer, for tax and accounting purposes is to treat the forgiven debt as if I had received a check when the debt was wiped clean.
That was the traditional rule. However, to counter the growing numbers of house foreclosures and subsequent tax problems which resulted, Congress has exempted certain debt forgiveness as a result of mortgage cancellations from inclusion in income. This has relieved some taxpayers, who felt that the tax provisions punished them twice, and angered others, who question why former homeowners are getting a break for making what was perceived to be a poor decision in the first place. Other taxpayers also question why the exemption didn’t extend to other personal debt, like credit cards and personal loans, that were forgiven as a result of nonpayment.
So today’s Fix the Tax Code Friday question is a two-parter:
Should Congress have allowed taxpayers whose mortgage debt was forgiven to exempt that debt from income? And, should Congress have taken it a step further and exempted all forgiven debt including credit cards and personal loans from income?
Tell me what you think!
Taxpayer asks:
Hey taxgirl,
I get that we have overspent in Congress. But who do we owe exactly? And what is the difference between the deficit and the debt? I know these aren’t really tax questions but you talk about it on your blog so I thought you might know.
Taxgirl says:
What great questions!
Yep, I definitely do talk about the deficit quite a bit on my site – that’s because tax policy (especially whether to raise or lower taxes) is often dependent upon our deficit levels.
Here’s the quick difference between deficit and debt:
1, The federal deficit is the overage of expenditures versus revenue/receipts in a fiscal year. In simple terms, if we spend more than we make, we have a deficit. If we were to spend what we took in (imagine that!), we’d have a “balanced budget”. And if we were to take in more than we spent, we’d have a surplus.
The deficit is recalculated every year based upon the shortfall or surplus each month. If we have a deficit, the Treasury borrows money to make up the slack. The Treasury does this by selling securities like T-bills, notes and savings bonds.
The deficit for the current fiscal year (as of last month) is $319.4 billion, more than twice what it was for the same period in 2007.
2, The federal debt is more or less the aggregate of all of the deficits that we amass. So if we owe $800 million one year (and it’s not repaid) and we owe $500 million in another year (and it’s not repaid), we have a debt of $1.3 billion. Make sense? And since this money represents borrowed money, we also pay interest on it.
According to the US National Debt Clock, our debt as of June 28, around 5:30 p.m. is $9,371,491,730,059.48. The National Debt Clock has calculated that the debt has increased an average of $1.33 billion (yes with a b) per day since September 28, 2007!
Yowza, that’s a lot.
If you want to see the breakdown by kind of debt and year (among other goodies) you can view the latest info from the federal Treasury Bulletin.
Now to the other part of your question: who owns the federal debt? A lot of folks have been making a great deal of noise about the fact that China owns a lot of our debt (not a good thing). That’s partly true. As of June 2007 (the last time this data was made available), 45% of the debt was held by the US Government in other capacities; 28% was held by private US citizens and an astounding 27% is held by foreigners. The British, Japanese and Chinese hold most of this segment of the debt. You can get some great perspective at The Skeptical Optimist – he has all of this info in a nice chart. You can also see a nice breakdown from the Treasury of those foreign governments that we owe money to in the form of securities.
My favorite part of the chart? The footnote that clarifies that those who have purchased the fourth most US securities are “Oil Exporters” including Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. Huh? How did we get to the point where we owe Iraq money?? But I digress…
At any rate, I hope that this answers your question. Thanks for reading!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl!
