Tax time is a stressful time, I know. And if you have student loans, there’s even more to think about. Here are are some tax-related tips to help guide you.
Deduct Your Student Loan Interest
Some of the student loan interest that you paid during 2016 may be tax deductible, which could lower your tax bill. Watch for a 1098-E statement issued by your student loan lenders, which will show the total amount of interest payments during 2016. Just keep in mind that the amount of this deduction is capped, and it is phased out entirely for higher income earners. Be sure to talk to your accountant to see if you’re eligible for this deduction.
Lower Your AGI
If you’re on an income-driven repayment plan like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE), your monthly payments are likely based on your Adjusted Gross Income (AGI), the taxable income as reported on your federal tax return. Your AGI can be reduced by certain pre-tax deductions such as contributions to certain retirement accounts or Health Spending Accounts (HSA’s). This may be smart financial planning generally, but it can also lower your income-driven student loan payments for the following year.
Married? How Should You File?
If you’re married, and one or both of you have federal student loans, you’ll want to consider tax filing status. Under three of the income-driven repayment plans for federal student loan borrowers (the Income-Contingent Repayment (ICR) plan, the Income-Based Repayment (IBR) plan, and the Pay As You Earn (PAYE) plan), your federal loan servicer will consider your joint income with your spouse only if you file joint tax returns. However, under the new Revised Pay As You Earn (REPAYE) plan, your federal loan servicer will consider your spouse’s income regardless of how you file your taxes. REPAYE uses a cheaper repayment plan formula as compared to ICR and IBR, but it may actually result in higher payments for some married couples who have been repaying their loans under ICR, IBR and PAYE while filing taxes separately. At the same time, however, filing taxes as married-filing-separately could result in higher overall taxes for the household. If those higher taxes offset the lower student loan payments, it could wipe out any savings.
Be Careful If You Are in Default
If you’re in default on your federal student loans, you may have been referred to a program that allows the IRS to intercept your federal tax refund and apply it to your federal student loan balance. If you are expecting a refund, you may want to resolve your student loan defaults first – which might mean filing for an extension to complete your federal tax return later in the year.
Student Loan Settlements, Discharges, and Cancellations
If you got any portion of your student debt cancelled in 2016 (which may have happened if you settled a student loan or were awarded a discharge), your former lender may send you a Form 1099-C, requiring that you report the portion of your loan balance that was waived as “income” for tax purposes. This might mean you’ll owe more in taxes than you originally thought. However, there are some ways of avoiding or reducing this tax — for example, if you were insolvent at the time that the debt was canceled (meaning your total debts exceeded your total assets), you may not have to pay extra taxes.
Talk to a Qualified Tax Professional
Tax issues can be challenging and complicated, and you don’t want to make a mistake and get on the wrong side of the IRS. Talk to a Certified Public Accountant or other qualified tax professional to get your tax questions answered and make the most of your options.
