Paying off your student loans is never easy no matter how long you have carried it. Whether you are following a standard repayment plan or you’ve signed on for a repayment program based on income, student debt can come with some steep consequences and is best avoided. While tax return time isn’t ideal either, you probably aren’t thinking about them whenever you write a check for your monthly loan payments. However, there are certain tax preparation hacks that pertain to student loan borrowers to give them some relief, and we have listed six below.
1. Very Interesting
Although the initial sum of the loan is off limits, the interest you pay on it is considered a legitimate deduction. Even if paying off a student loan is on the bottom of your priority list, claiming the student loan interest deduction can be enough to motivate anyone into making consistent payments. For this tax year (2015), tax payers may write off up to $2,500 of student loan paid interest on their tax return. This particular deduction is an above-the-line tax break that can be claimed on either Form 1040 or Form 1040A even if you choose to take the standard deduction or itemize deductions.
2. Tax Return Status is Everything
Unfortunately not everyone who applies for the paid student loan interest deductible is eligible to receive it. The claim comes with income limits and phase outs that change depending on filing status. In some cases there are valid reasons and benefits to spouses filing their taxes separately, but they are not allowed to claim a tax deduction for their paid student loan interest should they file two different tax returns.
On the other hand, married spouses who file a tax return jointly may qualify for at least part of the deduction if their modified adjusted gross income is below $160,000. Those who file as single, as the head of the household, or a qualifying widow must have a modified adjusted gross income of $80,000 or less.
3. Forgiveness Isn’t Always Divine
Forgiven debt on student loans can be a great thing in that it literally wipes away the debt you owe. But this sort of forgiven debt is considered income and can be taxable. This means that if the loaning agency forgives a $10,000 amount you still owe after 20 years, that $10,000 may be classified as part of your income and eligible to be taxed.
There are exceptions to this taxation in some cases. Anyone who received forgiveness from the Teacher Loan Forgiveness Program, the Public Service Loan Forgiveness Program, or another similar program, is exempt from this tax. Another way to avoid the tax is to file for bankruptcy, although that is always a last resort.
4. REPAYE
Also known as Revised Pay As You Earn, REPAYE is a new income-based student loan repayment plan available to anyone with a direct federal student loan. They may apply for this new program, which will put a limit of ten percent on the monthly payment of the borrower’s income. REPAYE can be beneficial to millions with student debt, but married spouses could see their monthly payments rise significantly. On the other hand, other income-based repayment programs look at income separately for spouses who file separately.
5. Life Learning
Those who are continuing their education can see a credit on their taxes via the Lifetime Learning Credit. It is available for students who have finished their first 4 years of post-secondary study or even those who take a course to continue their education. Although the credit covers both tuition and fees, it does not include the cost of books and other supplies unless the school is paid directly for them. Students may also take advantage of student loans to help pay for their tuition and, the IRS allows them to claim the Lifetime Learning credit even if a student loan is used to pay 100 percent of tuition costs.
6. Grants and Scholarships
Students who earn grants or scholarships to help pay for their education may also have the IRS view this as taxable income. This is especially true if it can be proven that the monetary value of these awards were not used for education related expenses. This is why it is important to speak to your loan servicer before you make a plan for your student loans.
Tax Return Help in Houston
If you live in Houston and need help with your tax returns, student loans, bookkeeping in general, give us a call at 281-894-6494 or send us an email.