New student loan benefits available on Minnesota tax returns
By Mike Crabtree, CPA, JD, tax partner, Boulay
Among the new Minnesota tax provisions for 2017 are two benefits related to student loans, including a student loan credit, and a subtraction for discharge-of-indebtedness income arising from the cancellation of certain student loans.
Student loan credit
The student loan credit is available only to Minnesota residents who are making payments on student loans taken out to fund their own education. Parents and family members cannot take the credit for making payments on the loans of others. For married couples, each spouse is eligible to claim the credit based on their own student loans. The credit is claimed on a new form, Schedule M1SLC.
Qualified education loans eligible for the new credit are loans that are used to pay for the costs of attending an eligible postsecondary college or university. The definition cross-references Section 221 of the Internal Revenue Code, with the limitation that the loan must be for the taxpayer's own education. Loans from relatives or an employer plan do not qualify.
The credit is computed as the least of four different amounts: A. $500; B. The borrower's earned income for the taxable year; C. Total loan payments (principal and interest) minus an amount equal to adjusted gross income (AGI) less $10,000 (but not less than zero) (married taxpayers both use the joint AGI); and D. The sum of the interest portion of loan payments made during the year and 10 percent of the original loan balances. This computation seems complicated, but Schedule M1SLC walks through the steps. The most the credit can amount to is $500 for a single filer or $1,000 on a joint return.
Subtraction for discharge-of-indebtedness income
The other new Minnesota tax benefit related to student loans is the subtraction for discharge-of-indebtedness income from the cancellation of certain student loans. As a general rule, taxable income is realized by the debtor when a debt is cancelled, but there are numerous exceptions to this rule (see Section 108 of the Internal Revenue Code).
The new Minnesota provision allows a subtraction from income when a qualifying student loan is discharged through a Minnesota or federal income-driven repayment plan. Examples of this type of plan include the federal Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAY) programs, as well as the Minnesota Teacher Shortage Loan Repayment Program. The definition of "qualified education loan" for purposes of the subtraction also cross-references Section 221 of the Code. The subtraction is claimed on Line 42 of Schedule M1M.
Mike Crabtree is a tax partner at Boulay. He has more than 17 years of experience finding answers to tax questions for businesses and individual clients. You may reach him at firstname.lastname@example.org or 952-841-3032.