Question

Lionel is an unmarried law student at State University Law School, a qualified educational institution. This year Lionel borrowed $24,000 from County Bank and paid interest of $1,840. Lionel used the loan proceeds to pay his law school tuition. Calculate the amount Lionel can deduct for interest on higher education loans. Lionel’s AGI before deducting interest on higher education loans is $82,000.

Tim is a single, cash-method taxpayer with an AGI of $50,000. In April of this year Tim paid $1,020 with his state income tax return for the previous year. During the year, Tim had $5,400 of state income tax and $18,250 of federal income tax withheld from his salary. In addition, Tim made estimated payments of $1,160 and $1,900 of state and federal income taxes, respectively. Finally, Tim expects to receive a refund of $500 for state income taxes when he files his state tax return for this year in April next year. What is the amount of taxes that Tim can deduct as an itemized deduction?

This year Randy paid $29,000 of interest (Randy borrowed $450,000 to buy his residence, and it is currently worth $500,000). Randy also paid $2,500 of interest on his car loan and $4,200 of margin interest to his stockbroker (investment interest expense). Randy received $2,600 of interest this year and no other investment income or expenses. His AGI is $75,000. How much of this interest expense can Randy deduct as an itemized deduction?

Answer 1

1. Interest on education loan can be deducted up to $2,500 subject to the phase out if the AGI is between $70,000 and $85,000 in 2019 which will be filed in 2020.

Phasout % = ($82,000 - $70,000)/ $15,000 = 80%

Phaseout amount = 80% of $2,500 = $2,000

Hence, student loan interest deduction is allowed up to $500($2,500 - $2,000). Lionel can deduct $500 of the $1,840 amount of interest on higher education loans.

2. Tim can deduct the state taxes paid with last year’s return, state tax withheld during the year, and estimated payments of state tax, a total of $7,580. The expected refund next year will not affect the deductions for this year, but may be taxable next year under the tax benefit rule.

3. Randy can deduct $31,600. The interest on the car loan is nondeductible personal interest but Randy may deduct all $29,000 of his interest on the home loan as an itemized deduction. The $4,200 of margin interest is likely investment interest, and this itemized deduction is limited to net investment income. Because the $2,600 of interest income qualifies as investment income and Randy apparently has no other investment expenses, the investment interest expense would be limited to his $2,600 in net investment income.