Unfortunately for professionals paying off student loan debt, their payments cannot be claimed as a business expense deduction on their taxes according to the Sixth Circuit Court of Appeals.
The court ruled Wednesday that student loans cannot be deducted as a “business expense” on personal income tax statements. Instead, they are to be classified as “personal expenses”.FN1
Tripp Dargie accumulated $73,000 in medical school debt in Tennessee and after graduating paid $121,440 to satisfy the loan (compound interest can really hurt). In an effort to lower his income tax liability from the previous year, he tried to amend his tax return and write off the loan repayment as a business expense. The I.R.S. blocked this strategy, which precipitated Mr. Dargie’s lawsuit.FN2
Judge Siler of the Sixth Circuit held that Mr. Dargie was unable to prove by a preponderance of the evidence that he was entitled to a refund. Judge Siler specifically stated that “ the payment . . . does not qualify as a deduction because educational expenses that allow an individual to meet the minimum requirements for practicing a given profession are personal.”FN3 More simply, the loan money enabled him to become a doctor, therefore it is a personal expense and not a business one.
The decision is especially relevant in 2014 with over $1 trillion of outstanding student loan debt in America. Nearly 20% of that debt which is currently due is delinquent and 10% of loans that became due in 2011 were in default only two years later (default: no payments made in nearly a year).FN4
Today almost everyone reading this has had experience with student loan debt, so we have to ask, should Tripp Dargie, and every other student turned professional, be given the tax benefit of being able to deduct loan payments as business expenses? Should the current tax policy highlighted by Judge Siler and the Sixth Circuit be reversed in order to reward students who increase their income because of the loan and pursuant education received? What about the further incentive to pay off loans in order to minimize tax liability right out of law school? What do you think? Let us know below – leave a comment.
FN1 – Dargie v. United States, Nos. 13-5608, 2014 WL 443439 (6th Cir. Feb. 5, 2014)
FN2 – Id. at *1
FN3 – Id. at *2
FN4 – Josh Mitchell, Student Loan Debt Slows Recovery, Wall St. J. Economics Blog (Dec. 30, 2013, 10:34 AM), http://blogs.wsj.com/economics/2013/12/30/student-loan-debt-slows-recove…