It’s that time of year again when you have to file your taxes with the IRS. It may seem simple enough but don’t forget how you file your taxes does effect your student loans. There are some things you should consider before completing your return:
- If you are married, you want to determine if it is financially advantageous to file jointly or separately from your spouse. When it comes to federal loans there are different repayment options you can choose from that effect your payment. They look at your AGI (adjusted gross income) from your most recently filed tax return to determine your eligibility and repayment options. You want to make sure you understand which income driven repayment plan you are applying for as well since the new REPAYE plan will take into consideration your spouses income whether you file jointly or not. However, the IBR or PAYE plan allows you to just use your AGI if you file separately and does not consider your spouses income.
- You can also claim your interest paid on your student loans but only if your MAGI (modified adjusted gross income) is under $80,000 if filed as head of household or single and $160,000 if filed married. Unfortunately if you filed separately you can not qualify to deduct the up to $2,500 in student loan interest paid.
- The great thing about the Income Driven Repayment plans are the reduced monthly payments and the ability to qualify for forgiveness but unfortunately once the loan balance is forgiven the forgiven amount is taxable income. For example, if your income was $80,000 and they forgive $75,000 your taxable income for that year is $155,000. This could certainly mean being bumped up to the next tax bracket and owing more in taxes for the year. If you plan ahead, however, you can offset some of this cost.
- For students, getting grants or scholarships are great but these can also be taxed. This could be inconsequential to some while others could struggle to pay the taxes due. You want to be aware of this possibility when accepting any grants or scholarships.
The key is understanding the effects of filing your taxes a certain way and how it effects your return or the amount you end up paying in. Make sure to run the numbers both ways and call us with any questions. We are here to help you make the best decision when it comes to paying back your student loans. Filing your taxes correctly can be a big part of that.