Tax day is quickly approaching, and there are undoubtedly many consumers who are putting their taxes off until the last minute. Up to 25 percent of taxpayers file within two weeks of the deadline, according to the IRS.
For student loan borrowers wondering what the best tax strategies are, here are a few things to keep in mind.
How Borrowers Should File
Many married individuals wonder whether filing jointly or separately is the best plan. The answer to this really depends on their individual circumstances.
There are many advantages to filing jointly; borrowers will be eligible for the student loan interest deduction and other tax credits. But many married individuals with student loan debt elect to file individually so their monthly loan payment will be lower, according to the Detroit Free Press.
This is especially true for borrowers enrolled in income-based repayment plans (IBR). An IBR is calculated annually based on a borrower’s gross income. When a borrower files jointly with their spouse, both incomes will be taken into consideration when calculating monthly payments.
Filing separately won’t make sense for all borrowers as it means they will make much less progress on paying back their student loans. But for borrowers who are still in school and are especially cash-strapped, this could be a helpful alternative.
The Student Loan Interest Deduction
All borrowers are entitled to a student loan interest deduction of up to $2,500 a year. This is true whether borrowers are filing jointly or separately, though it does exclude married couples who choose to file separately.
The student loan interest deduction is an above-the-line income adjustment so itemizing deductions is unnecessary. And the deduction is slowly phased out if borrowers have a modified adjusted gross income between $65,000 and $80,000 a year. For joint returns, this is $135,000 to $165,000 a year.
Potential Garnishment of Refund
For borrowers who have fallen behind on their monthly loan payments, it is possible to have their tax return garnished and applied to the balance of the loan. If this happens, borrowers should receive a notice informing them they won’t receive their refund.
However, only the state and the federal government have the authority to do this. This means it’s only possible for borrowers who have outstanding federal loans or are part of a federally insured loan program. Borrowers with private loans that are delinquent are at less risk of having their refund garnished.For more information about tax return garnishment, borrowers can consult the Treasury Offset Program through the U.S. Bureau of the Fiscal Service's Debt Management Services.