Most people don’t really look forward to that time of the year where they are required to do their taxes. More especially, student loan borrowers. However, during tax time, you can utilize this opportunity to manage and stock your student loans while evading any mistakes that can cost you later.
Here are some tips regarding student loans tax that will guide you during the 2019 tax period. Remember, understanding the basics of how student loans play into your taxes is very essential.
You Can No Longer Be Taxed on Disability Discharges for Federal Student Loans
Did you know that disability discharges for federal student loans are now tax-free? This move was implemented in 2018. In the past, all discharges for federal student loans were taxable. That is the loan was perceived as a form of income once the debt was cancelled. Thus, you as a borrower were required to pay for income taxes on that cancelled debt.
Make Use of The Student Loan Interest Reduction
Currently, under the federal tax code, student loan borrowers are permitted to claim the interest they paid during the course of the year to be deducted. This is an excellent way for you to manage your student debt. Your student loan lender is expected to provide you with a 1089-E statement as long as you did pay for the loan in the year 2018.
From that statement, there should be records indicating how much money you paid back as interest, and from that amount, you can claim a deduction. Some people are fortunate enough to get modest deductions from their student loan interests. The downside of this is that your income has to be high enough for you to benefit from this initiative.
Negotiated Settlement of Student Loans Could Attract Additional Taxes
Negotiated settlements of student loans are quite popular today. A student loan borrower can approach a lender with a lump sum of money and settle for a waiver of the remaining portion of the balance. This has its perks to both the lender and the student loan borrower. Because the latter receives a cancellation of the remaining debt and the lender receives a lot of money up front.
These negotiated settlements, however, do have their cons. During the tax time, the lender should send the borrower a Form 1099-C which requests the borrower to inform the IRS that the debt was cancelled as income for taxation purposes. This document is usually issued for the year in which the debt was forgiven. For instance, if you had a student loan of $20,000 and agreed with the lender to settle for $15,000. That means the $5,000 will be waived. This could in turn result to the payment of additional taxes by the student loan borrower.
There are ways in which the additional tax can be eliminated. For example, if you had more debts than assets during the settlement, you may not be required to pay tax.
Yes, you might not choose to default on your student loans intentionally. But, if you have, you need to find a way on how to remedy the situation. Since the federal government is mandated to intercept tax refunds for individuals who have defaulted on federal student debts.
The Treasury Offset Program is responsible for the interception. And, they can advise the IRS to apply your tax refund to your defaulted student loan. The good thing is that the Treasury Offset Program seizure applies to interests and principals only.
It is wise, if you are expecting a tax refund in 2019, you need to first settle your student loan defaults as earlier as possible. You can employ a couple of statutory programs to help you out with ending defaults on your student loans.
Reducing Adjusted Gross Income Can Contribute To Reduction of Student Loan Payments
Most people don’t know that income-driven repayment plans can significantly minimize student loan payments. In instances of income-driven plans like Pay As You Earn, Revised Pay As You Earn, Income-Based Repayment and Income Contingent Repayment, the student debts are linked to Adjusted Gross Income.
The Adjusted Gross Income is primarily not your gross salary. It can be tailored to meet the requirements of certain pre-tax deductions. Contributing to retirement and health plans can aid reduce a person’s Adjusted Gross Income. Setting aside money for your health and retirement is ideally a brilliant financial move. It also aids reduce student loan repayments.
Quite often, student loan borrowers feel that they are out of options. But, this is not entirely the case. Let’s face it, student loans and tax laws are quite complex. If you are finding it difficult navigating around your student loan tax all by yourself or you feel unsure, then it is high time you seek professional help.
A financial planner, an attorney or a certified accountant can help you understand your financial situation. Moreover, these professionals can also provide you with favorable options you can explore regarding your student loan tax for 2019.