It’s that time of year. Whether you are proactive and you already have your tax forms organized and ready to go (that’s me, don’t hate), or you’re a procrastinator and you’re just going to wait until the second week of April to even think about this stuff, tax time is looming. It’s a good time to remind everyone that your student loans can have an impact on your taxes, and your taxes can have an impact on your student loans. Here’s how:
- Tax-Deductible Interest. Student loan interest that you paid during the tax year may be deductible on your return. In other words, you might be able to lower your tax bill (or increase your refund) if you made qualifying student loan payments. The amount that you can deduct is capped, and the deduction is phased out for higher income earners, so be sure to talk to your accountant to see if you’re eligible.
- Adjusted Gross Income (“AGI”) and Income-Based Repayment (IBR). The most common way to have a monthly student loan payment calculated under the IBR program for federal student loans is to review the “Adjusted Gross Income” figure on your tax return. This is NOT the same thing as your annual salary. It is, by definition, “adjusted” and takes into account various pre-tax deductions, such as certain retirement contributions, qualifying business expenses, certain health care expenses, and other deductions. Thus for many borrowers, using the “AGI” from their tax return will result in a lower monthly IBR payment than using a paystub, which just shows gross income. Talk to your student loan attorney (I know a guy) and your accountant to determine how this may impact you.
- Joint Tax Returns. If you’re married, and one or both of you have federal student loan, you may want to think about how you file your tax return. Under the Income-Contingent Repayment (ICR) plan, your federal loan servicer will consider your joint income with your spouse, regardless of how you file your taxes. However, under the Income-Based Repayment (IBR) and Pay As You Earn (PAYE) plans, your federal loan servicer will consider your spouse’s income ONLY if you file joint tax returns. Thus for some married couples, it may make sense to file separately in order to obtain savings on your monthly student loan payments. However, you might also pay higher taxes if you file separately, so there is no one-size-fits-all solution here. Again, talk to your student loan attorney (seriously, I really do know a guy) and your accountant to determine how this may impact you.
- Claiming Dependents. Under any of the income-driven repayment plans (ICR, IBR, PAYE), your loan servicer will factor in your family size. Thus claiming dependents on your tax return may lower your monthly student loan payments a bit.
- Are you in default on federal student loans? If so, you may have been referred to the Treasury Offset program, which allows the IRS to seize any tax refund that is due to you and involuntarily apply it to your student loan debt. Many people are shocked that this happens, but it is the most common way that the government uses its power to involuntarily collect from defaulted borrowers. It’s a major incentive to resolve your federal loan defaults.
- Did you settle a student loan debt last year? If so, you may be issued a Form 1099c from your lender, requiring you to report any portion of the loan balance that was waived after the settlement as taxable income on your return. You may have to pay a tax on that, but your accountant or tax advisor can help you figure out what you have to do.
As I tell all my readers and all my clients, I am not a tax advisor, so please seek the assistance and expertise from a professional tax expert, such as a Certified Public Accountant. I’m simply letting you all know about what you should be thinking about as you start gathering your willpower to do your taxes this year. Good luck!
