3 Things Doctors Need to Know About Medical School Loans and Mortgages
Many doctors are in debt their first few years of work because of their medical school loans and the interest that the loans accrue. In addition, many doctors are paying mortgage interest on a house. While the interest deduction on student loan payments has limitations based on income, mortgage interest does not. As a result, it is usually beneficial for doctors to pay down their student loan debt before their mortgage. Here are 3 things doctors should know about paying their loans and mortgages:
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Depending on a number of factors, one may be eligible to claim up to $2,500 from their student loan interest as a deduction. Since this is an adjustment to income, one may claim it even if they choose the standard deduction instead of itemizing. Any filing status, aside from married filing separately, allows for this potential deduction. For those married filing jointly, the total joint amount is capped at $2,500. For the 2019 tax year, the interest begins phasing out when income reaches $70,000 for single or head of household filers, which means that only a percentage of the interest is deductible. It is completely phased out at $85,000. For a married couple filing jointly, the phase-out begins at $140,000 and is completely phased out at $170,000. Once this upper limit is reached, filers no longer qualify for any deduction on the student loan interest.
In contrast, mortgage loan interest does not have any income limitations. However, for mortgages originating on or after December 15th, 2017, only the interest on the first $750,000 of debt (325,000 for single filers) is deductible. For mortgages originating before then, filers can deduct full interest on the first $1 mil ($500k for married filing joint). Therefore, one should be careful about refinancing their home and becoming subject to the stricter limitations.
Another thing to keep in mind is that the interest on a home equity line of credit is only deductible if used to purchase or improve the home. The deduction is only applicable if one chooses to itemize his deductions after adjusted gross income, instead of taking the standard deduction. If he has state and local taxes, personal medical expenses, and charitable contributions, itemizing will typically put him above the standard deduction amount.
Because of the income limitations on the student loan interest, it will generally behoove a doctor or dentist to pay off his student loans before paying down his mortgage. If he is above the phase-out threshold, he will not be able to benefit from the student loan interest deduction. However, no matter what his salary is, he will still be able to benefit from the mortgage interest deduction. While many doctors do not know of all the deductions available to them, qualified CPAs like us do. We are constantly educating ourselves regarding updates to the limitations on the deductions in order to utilize them properly. It is important to have the correct guidance from licensed professionals like us to put you in the best possible financial situation and not pay a dollar more in tax than necessary.