Long term tax planning with your student loans

Michael Lux Blog, Lower Payments, Student Loans 1 Comment

April 15 is in the rear view mirror.  Once again, tax day is behind us.  That is the good news.

The bad news that April 15, 2016 will be here before you know it.

Why bother with tax discussion at a time like this?  Because now is the time that you can make a difference.  The actions you take today can make next year better.  If you wait until next April, it will be too late.

One critical subject to consider in your long-term tax planning is student loans.  Here are a few tips to limit the pain for next year.

Keep records of your student loan payments.  As you may now the interest is deducible up to $2,500, subject to income limitations… if you make too much you can’t claim the deduction.  What many people don’t realize is that the IRS doesn’t require lenders to provide documentation of your interest payments unless you paid over $600 in interest for the year.  If you have many lenders that fall a bit short of the $600 reporting threshold, you could end up have a huge chunk of change that could be deductible.  Even if your lender doesn’t provide the 1098-E, you can still deduct the interest.  The important part is to keep your records in order so that you can prove all of the interest you paid.

[Side Note: Don’t put off paying off your loans because you want to max out the student loan interest deduction.]

Do what you can to keep your AGI down.  If you are on an income based repayment plan for your federal student loans such as IBR or PAYE, your Adjusted Gross Income is what will determine your payments each year.  In tax terms, reducing your AGI is accomplished by maximizing what are called above the line deductions.  Examples of above the line deductions would include many types of retirement plan contributions and health savings account contributions.  If you maximize these accounts not only do you avoid paying taxes on these funds, but you also reduce your monthly payment requirements on IBR.

If you are married, have a plan.  If you or your spouse are on an income based repayment plan, you should be aware of the major consequences of filing jointly versus separately.  The big difference is that if you file separately, IBR payments are determined based upon individual salaries.  However, by filing jointly, the government will expect you to be able to pay more towards your student loans.  That being said, filing separately isn’t always the best idea.  Going this route means your tax bill will be bigger next year.  If you filed jointly for the most recent year, but are thinking about switching it up for next year, start planning for your bigger tax bill.  If you are ready for the upfront costs in April, you can be enjoying lower student loan payments throughout the year.

Fresh after making your tax payments, the last thing you want to do is think more about taxes, but if you plan now and act accordingly, next year might hurt a little less.