You should have received your W2s by the end of last month and now the countdown begins to the April deadline to file your taxes. If you’ve got student loans, you have important decisions to make when filing your 1040 to take advantage of certain benefits available depending on your filing status and financial circumstances. Here are five tax tips for this year and beyond to protect your financial well-being and help you get the best results on your 2014 tax filing.
#1 Check Out Turbo Tax for Information on IBR
This year, TurboTax Online by Intuit has paired up with the Department of Education to help get the word out about income-driven repayment plans. Intuit users will see a banner ad promoting income based payment plans that, when clicked, will take you to the DOE’s online repayment estimator to see how plans could change your monthly payment amounts, time to pay your loans and interest paid.
Additionally, H&R Block offers their own software to help with tax preparation. If you decide to use tax prep software – which is an affordable option to get expert preparation help – H&R Block offers a wide range of software to assist you. From their website, you can purchase tax prep products that range from free to $49.99 and all come with free advice to make sure you get the best results. Click here to save 15% on H&R Block Online Tax Software.
#2 Think Hard About Filing Status Choice
There are two factors to consider if you’re married and have student loans. First, student loan interest is tax deductible if you file your taxes as single, head of household or married filing jointly. Second, married filing separate filers are not eligible for the income tax deduction. On the flip side, filing married filing jointly can make you ineligible for income based repayment. If you don’t need IBR, filing MFJ gives you the tax deduction advantage. You may need to compare which is most advantageous – consult a tax pro for assistance if you’re unsure how to crunch the numbers.
#3 Consider Putting Your Refund Toward Your Principal
Many people like to splurge with their tax refund and put it towards a vacation, big screen TV or other large purchase. Instead, consider plunking it down as a lump sum payment toward your student loan principal. If you normally get a $2,000 refund and owe $25,000 in loans at 5%, even devoting one refund to your student loans will get you out of your loans 15 months early and save you $1,195 (the interest and principal saves $3,195 less your $2,000 investment). If you do it every year, after five years and 10 months your loans will be vanquished and you will have saved $3,635 ($13,635 less your $10,000 investment).
#4 Rethink Your Payroll Withholdings
If you are getting a sizable refund, this means you are actually over-withholding on your payroll. The ideal situation is that you owe nothing and get nothing back when you file your taxes. Otherwise, you are effectively loaning the government your money all year long, interest-free. When you file your taxes this year, look at your total tax liability and divide it by your payroll periods (if you’re paid bi-weekly, there are 26, etc.) and lower your withholdings on your W4 so that you are withholding the amount (or close to it) rather than over-withholding. Take your savings and apply them as extra principal payments to your student loans. For instance, a $2,000 tax refund represents over-withholding of $77 per bi-weekly payroll or $166 per month. Apply this to your student loan principal and for a $25,000 loan at 5%, you’ll pay your loans off five years earlier and save $2,816 in interest, without a decrease in your disposable income.
#5 Take on IBR or PAYE with Caution
If you cannot afford your student loan payments, IBR and PAYE are great options. They even promise loan balance forgiveness after 25 and 20 years, respectively. However, the forgiveness is taxable and this can see you with a debt to the IRS that outweighs your original student loan balance. For instance, if you owe $25,000 at 5% and are working part-time or in a low income position that pays $20,000, you would qualify for IBR with a monthly $30 payment. If you stuck with IBR for 25 years, your taxable write-off would be more than $21,000. In the year of your write-off, if you were still paid $20,000, your total “income” would be $41,000 for tax purposes, resulting in additional taxes of $3,150 on top of your usual income taxes. This would be untenable on an income this low – so be careful and look this gift horse in the mouth closely…
If you haven’t already signed up for Tuition.io’s free student loan tool, now is the time. You can see all of your federal and private student loans in one dashboard, track your payments, see the impact of additional payments and how repayment options will affect your payoff date and interest paid. Be sure to read our blog daily for more tips like these and news on all things student loan related!