President Donald Trump and the Republican Party recently unveiled their tax reform plan, which eliminates the student loan interest deduction — a move that could impact many borrowers.
Although it’s far from finalized and still requires the approval of both the House and the Senate, here’s a broad outline of the tax plan and an explanation of what it could mean for you.
What is the student loan interest deduction?
Trump’s tax plan eliminates the majority of itemized deductions, including those for moving and for paying medical expenses that equate to more than 10 percent of your income. It also limits the mortgage interest deduction to new home purchases of $500,000 or less (the current limit is $1 million).
Also gone is the student loan interest deduction, which allows you to deduct up to $2,500 of student loan interest directly from your taxable income.
To qualify for the deduction, you must have paid interest on a student loan in your name, must not be filing separately if you’re married, and must not be claimed as a dependent. You also must have earned less than $80,000 for single filers or $160,000 for married couples filing jointly.
In 2015, more than 12 million filers claimed this deduction, according to the IRS. It wasn’t exactly a huge boon for student loan borrowers, though.
Among those 12 million filers, the average amount of interest claimed was $1,100, according to CNBC. If you were in the 25 percent tax bracket, it would have amounted to savings of $275.
Even if you had sky-high loans and interest, the maximum you could save was $625 per year (assuming a tax rate of 25 percent).
Although it’s small, that deduction matters to borrowers who are struggling to pay their student loan bills. Many were unhappy to learn of the proposed change.
The GOP is going to get rid of my student loan interest deduction to finance a tax cut for Donald Trump and Steve Mnuchin.
— Just Me. (@NoThoughtsHere) November 2, 2017
The House GOP tax plan eliminates the student loan interest deduction. How is making it harder for people to get out of debt a good thing?
— David Edward Burke (@DavidEBurke) November 2, 2017
“The student loan tax deduction is an above-the-line deduction that benefits a lot of graduates just starting out,” said Kelly Phillips Erb, a tax attorney and senior editor at Forbes. “This is an emotional gut punch when you look at it.”
To see how much you’ll lose if the tax plan goes through, plug your numbers into our student loan interest deduction calculator.
3 other ways Trump’s tax reform plan could affect you directly
While the loss of the interest deduction grabbed the attention of many borrowers, student loan expert Mark Kantrowitz told CNBC that other parts of the tax plan likely will have a greater effect.
“The real question for a lot of borrowers isn’t going to be the loss of this particular deduction,” he said. “It’s, do I come out better with all of the changes, or am I worse off?”
So, although the proposed tax reform includes huge changes — like reducing the corporate tax rate from 35 to 20 percent, eliminating the estate tax and alternative minimum tax, and ultimately increasing the deficit by $1.51 trillion in the next decade — how could it affect you directly?
Here are three things to keep an eye on.
1. Your tax bracket could change
The new tax plan reduces the number of brackets from seven to four, but for the most part, it affects only people at the top or bottom of the income range.
One notable exception is if you earn less than $37,950 as a single person or less than $75,900 as a married couple filing jointly; in that case, your tax rate would drop from 15 to 12 percent.
2. Your standard deduction and child tax credit could increase
Because itemized deductions are being nearly eliminated, the GOP has proposed other deductions to replace them.
The standard deduction would nearly double: from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples.
The child tax credit would increase from $1,000 to $1,600 and would include a $300 credit for each parent and non-child dependent (such as college students). These credits would expire after 2022.
For a married couple with two children earning $60,000 per year, the proposed changes would reduce their tax liability from $1,608 to $472, according to The Wall Street Journal.
But experts argue the picture wouldn’t be so rosy for every family.
“Everyone is talking about doubling the standard deduction, but what’s lost is that they are getting rid of personal exemptions,” said Erb. “For some middle-class families with children, doubling the standard deduction won’t offset the loss of those exemptions. Additionally, the increased child tax credit might not offset the loss of exemptions for some families.”
An increase in the standard deduction also will lead to fewer people itemizing their taxes — which could lead to fewer charitable donations.
3. You might not be able to deduct your state and local taxes
One of the most controversial elements of the tax reform bill is the reduction of state and local tax (SALT) deductions. If you live in a high-tax state, such as New York, Massachusetts, or California, you could suffer a big hit.
Previously, you could deduct sales, property, and local and state income taxes. But with the proposed tax reform, you’d be able to deduct only property taxes, with a limit of $10,000 per year.
Overall, Erb said Trump’s tax reform plan will “probably be a wash” for most people — with the exception of top earners, for whom it means “huge benefits.”
“You might not get hit for more in the middle class, or you might see a little benefit, but you’re not getting something big,” she said. “The little dribbles they used to give you, like student loan interest deductions, they are taking away.”
Miranda Marquit contributed to this story.