Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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This question applies to 2019 taxes. I’m currently getting the full student loan deduction of $2,500. In 2019, however, my income is going to increase by a significant amount. My gross salary will be $78,000 (has been ~$50-53,000 for the last three years). I understand that student loan interest is not deductible if your MAGI is above $80,000, but I’m trying to nail down the particulars about partial phaseouts. I expect to contribute about $9,000 to my 401 k pre-tax. The company will also deduct about $3,000 for insurance annually. Finally, I can pay for transit pre-tax up to $255 per month ($3,060 annually). With that in mind, that would make my hypothetical MAGI around $63,000. Do I have to add back in the student loan deduction, though? If so, that would put me right above $65,000, which is where the phaseout starts. Am I interpreting this correctly?
MAGI is calculated without student loan interest deduction. It sounds like you will be hit by the phaseout this year. The phaseout amount will likely be small since you're so close to 65,000. Since the phaseout covers 15,000 and you lose 2,5000*marginal tax rate, then for every dollar over 65,000 magi you will lose: 0.17*tax rate. Based on your income, I assume you'll be in the 22% bracket and I'll estimate you state tax at 3% so 25%. Consider adding an additional amount in your 401k equal to the amount you'll be over 65,000 MAGI. Your immediate ROI will be 0.25*0.17=4.3%.