I should pay $6000 in interest per year, which is 500 per month.
However, I am using income based repayment and am therefore only paying $50 per month. This means $450 a month, which is $5,400 per year, is being capitalized.
At the end of the year I have paid $600 in interest, and capitalized $5,400 in interest.
Can I claim the maximum student interest deduction of $2,500, since I have $6,000 in interest?
Disclaimer: You should consult a tax professional rather than rely on tax advice from a message board.
No, you don’t take the deduction for capitalized interest as it accrues; you take the deduction as you pay off the capitalized interest. In your example, your principal amount will increase by $5,400. Next year, if you start making repayments to principal, you may deduct up to $5,400 in principal payments as interest because $5,400 of your new principal balance actually came about due to capitalized interest. See the section “Allocating Payments Between Interest and Principal” in the Publication 970.
Caldazar has got it right. Especially the part about seeking advice from a professional.
As an example of this from real life, one of my clients had a student loan in deferral for nearly a decade because they never had enough income to make payments. Interest kept being capitalized, but was not deductible. Then the client refinanced the student loan, so a new lender paid off the old lender. For that year, there was a 1098-E reporting $42,000 of student loan interest paid. (Which is a shame because you can’t get a tax deduction for more than $2500 per year).
Meant to add that since there is a $2500 limit on student loan deductions, you wouldn’t actually be able to take the full deduction if you paid more than $2500 in Interest + Capitalized Interest.
Of course, this is for knowledge purposes, I’ll be filing my own taxes but I was conflicted on this one.
This passage:
Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.
makes me think that one could, as in the above scenario, take the full $2,500 deduction.
I’m 26, not making shit where I work, but if I shit out a kid I wouldn’t pay anything in taxes. Nice how my tax dollars are being turned over to someone my age who is too irresponsible to wait to have kids.
I wish there were some other deduction I could grab. I took the maximum for flex, but still I’m going to have to pay in towards taxes.
Trust me on this, if you do have a kid, you’ll be one of those clients who whines that you don’t get as much of a tax break as you thought you would. Best case scenario is that having a child is worth about $5,000 in tax “savings.” If you can give birth and/or raise a kid on less than $5,000 a year, you should quit your day job and start writing books and giving lectures.
That isn’t the point, that it costs more than $5000 to raise a kid. The point is that they are not having to pay their taxes which inflates my taxes.
I can never give birth, I’m a man, but raising a kid on $5000 a year…wake me up, please, enlighten me. What exactly so so expensive about raising a child that it would cost $5000 a year? Reasonably, that is. Wiki says 7-9k a year. It counts $2500 of that as housing costs. What? The house is what it is, heating cost increase is marginal, food is marginal unless you’re an idiot. Medical is mostly covered by insurance. What the hell am I missing?
Also, nitpick; whining is griping when you have no legitimate complaint. Subsidizing parent’s income with my tax dollars is a legitimate complaint.
You have free insurance that would have no increase in premium for adding a child? Sweet! Have free baby clothes in various escalating sizes lying around? Nice. Have a stash of diapers? Car seat, stroller, crib, cradle, swing, playpen, child-proofing accessories, diaper pads, cloths, swaddlers, nursing pillows, covers, bedding, bottles, pumps, bags, etc?
I’m a frugal dude with 2 kids. Always had a stay at home parent with no income trade-off. Still, it’s expensive. Kids require buying all kinds of things and it never ends.
Plenty of people do it with a LOT less than all those expenses. Heck, it looks like the majority do.
As for a metro area: yeah, but you are getting a metro area pay, plus you have a second parent that is paying bills. If you are a single parent, how is that my fault?
Regardless it ignores the fact that people without kids are subsidizing people that want to have kids. Not just in property tax but income tax too? Come on!
