Taxes are tricky and they offer opportunity for student loan borrowers to save some money, but they also can lead to some headaches. Let me first say that I am NOT a tax professional. I’ll say it again: I am NOT a tax professional. I highly encourage borrowers to seek the advice of a certified public accountant or other tax expert. All that said, here are some things to be on the lookout for as you start preparing your taxes.
- Are you currently in school? If so, you may able to claim some of the money you spent in 2012 on tuition, fees, and course materials as a deduction on your tax return, which can lower your tax bill or increase your refund.
- Are you on an income-sensitive repayment plan such as Income-Based Repayment (IBR)? If so, remember that your adjusted gross income (AGI) is part of the formula used to calculate your monthly payment. See if there are ways of reducing your AGI, such as by making larger pre-tax contributions to a retirement account. This can effectively lower your AGI and thus your monthly student loan payment under IBR.
- Under Income Based Repayment (IBR), your federal loan servicer will consider your joint income with your spouse if you file taxes jointly, but will only consider your income (without your spouse’s) if you file taxes separately from your spouse. This can significantly impact your monthly IBR payment (and your spouse’s as well). There may also be other tax consequences to consider when filing separately, though, so this is just another reason to speak to a tax professional.
- Did you make payments towards student loan interest during 2012? If so, you may be issued a tax form by your lender/servicer that allows you to claim some of the interest you paid as a deduction. This can lower your tax bill or increase your refund.
- Are you in default on your federal student loans? If so, remember that the federal government has powerful collections tools to go after you. One of those powers allows the U.S. Dept. of Education or your FFEL guarantor to seize your tax refund (without a court order!) and apply it to your loan balance. You are supposed to receive notification in advance of such a seizure to give you the opportunity to resolve the default.
- Did you settle a federal or private student loan for less than the full balance during 2012? If so, you may be issued a tax form that requires you to report the waived portion of the settlement on your tax return, and you will have to pay a tax on that amount. Your qualified tax professional can help you reduce or minimize the resulting tax burden.
I say again: I am NOT a tax professional, and while I can alert people to tax issues that they should be thinking about, I am not at all qualified to provide specific tax advice. Therefore I highly encourage all my clients, and all my readers, to consult with a qualified tax expert in order to explore the applicability of these (and any other) tax issues.