Taking advantage of the student loan interest deduction
December 04, 2018
Allen M. Schiff
Washington — In 2017 the ADA successfully advocated to ensure the dental profession benefits from the tax reform law that passed Congress. The Tax Cuts and Jobs Act was the first major rewrite of the U.S. tax code in more than 30 years and contained many changes that could affect dentists' financial planning.
With the 2019 filing deadline approaching, the ADA News will feature a series of articles focusing on how the new law will affect dentists beyond the revised standard deductions.
First up is the Student Loan Interest Deduction, commonly known as SLID. Retaining the student loan interest deduction at its current levels was an important component of the ADA's advocacy efforts in tax reform.
In 2017, the average educational debt for dental school graduates with debt was $287,331, according to the Journal of Dental Educators' 2017 survey of dental school seniors. Interest payments on student loans are tax deductible, up to $2,500 — depending on income.
ADA News talked with Allen M. Schiff, a certified public accountant and president of the Academy of Dental CPAs, to see what dentists should be doing to take advantage of the Student Loan Interest Deduction. Mr. Schiff is the president of the academy, which is made up of 26 dental CPA firms representing more than 9,000 dental practices.
ADA News: What should dentists look for in using the Student Loan Interest Deduction?
Mr. Schiff: Many dentists paid for their dental school educational costs via a student loan. These loans come in all shapes and sizes — from federal programs to state programs with everything in between. Obviously after graduating from dental school, these loans should be repaid after a forbearance period is met.
Once the forbearance period expires, interest starts to accrue on such loans. So, the question that begins to evolve is, “Will the interest costs associated with student loans be tax deductible?” You may be under the impression that any interest expense associated with your student loan is, in fact, tax deductible for income tax purposes. This is true, but there are income limitations to SLID. First and foremost, the most you can deduct for student loan interest is $2,500 per year. However, there are Internal Revenue Service regulations on such tax deduction.
For example, if you file your income taxes as a single taxpayer, the $2,500 deduction is intact up to $65,000 in income (like a W-2 with gross wages of $65,000 per year). Once your income exceeds $65,000, the $2,500 tax deduction phases out. For example, if your income is $70,000 instead of $65,000, the $2,500 student loan interest deduction reduces from $2,500 to $1,667. The student loan interest deduction fully phases out at $80,000 in income. For married filing joint taxpayers, the $65,000 income level grows to $130,000 and fully phases out at joint income of $165,000.
ADA News: Does your graduation date or location matter? What about using SLID during a residency?
Mr. Schiff: The student loan interest deduction is not impacted by what dental school you graduated from or the year of graduation. Most states follow federal income tax law as indicated in the previous question. So, to answer the question, no, it does not matter where you live as far as the student loan interest deduction is concerned. As for residencies, yes, dentists can take advantage of the student loan interest deduction even during their residencies.
ADA News: Are there any forms of which dentists should be aware?
Mr. Schiff: The student loan interest deduction is reported each year by the lender, via IRS tax form #1098E. As the taxpayer, please be sure to give this tax form to your dental CPA. This way you can be certain the tax deduction to which you are entitled will be taken by your tax return preparer. Please go to https://www.irs.gov/pub/irs-pdf/f1098e.pdf to see an example of IRS Form #1098E.
ADA News: What is the best strategy for paying off student debt?
Mr. Schiff: Once you graduate from dental school, you should start to think about the loan repayment strategy you will employ to retire the student loan debt. I suggest starting with making every effort to retire the highest interest rate loans first. You may have to make minimum loan payments on other loans while working towards the higher interest rate loans. Also, please check on the various student loans you have for some may retire themselves if you give back by giving of your time to the local community and/or a local state-run health clinic.
ADA News: Should dentists consider refinancing?
Mr. Schiff: Once you land your first associate job, please consider using a loan consolidator to help you refinance your student debt. There are various loan consolidators available to dental school recent graduates.
The information in this piece is not intended to be, nor should it be construed as, tax, accounting or legal advice. Readers are urged to consult a qualified professional when seeking such advice. The ADA makes no endorsement of the above advice, nor of any website or organization mentioned in the above piece.
Editor’s note: While there are a number of companies dentists can refinance with, the ADA has partnered with the student loan-refinancing program Laurel Road. For more information on Laurel Road and student loan refinancing and current rates, visit LaurelRoad.com/ADA. For information on ADA debt resources, visit ADA.org/mydebt.