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How Student Debt Affects Your Taxes

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How Student Debt Affects Your Taxes

Americans owe over $1.3 trillion in student debt, a number that continues to increase as the cost of education rises. Nearly 40% of adults under 30 have student loan debt with two-thirds of college seniors taking out a loan to pay for their education, according to the Pew Research Center. While the median amount of debt among all borrowers is $17,000, one-quarter of student loan borrowers owe at least $43,000. 

The cost of student debt often makes headlines, but the impact of student debt on taxes is often overlooked. Student loan debt can impact taxes in many ways, both positive and negative. 

Student Debt and Tax Deductions

Student loans are expensive and can be difficult to manage but there may be tax benefits that help offset the cost. Student loan borrowers can deduct the student loan interest paid every year through the student loan interest deduction. This reduces the borrower’s taxable income by up to $2,500 for borrowers whose modified adjusted gross income is less than $65,000 or by a lesser amount for higher income levels. There is an IRS tool borrowers can use to check if they are eligible to claim the deduction. 

This deduction can result in $625 back for borrowers in the 25% tax bracket. It’s important to remember that only the borrower who took out the loan can get the deduction, whether it’s the student or the parent, but neither qualifies for the deduction if the student is listed as a dependent on the parent’s return. 

This is the only tax deduction applicable to student loans but there are tax credits available for students in college such as the American Opportunity Credit which is worth up to $2,500 per year for students attending at least half-time. The Lifetime Learning Credit is another credit worth up to $2,000 per year for books, supplies, fees, and tuition. These credits are only available to students still in school. 

Student Loan Tax Refund Offset

When a federal student loan falls into default, the Department of Education can refer the account for collection to the Department of Treasury. This is done through a tax refund offset of the borrower’s federal and sometimes even state return. The Treasury can withhold the entire refund amount and apply it toward the outstanding student debt. 

Under the law, the IRS must provide a proposed offset and the chance to review loan records. This notice is sent by mail. It is possible to prevent or overturn a student offset, however. Possible solutions may include: 

  • Consolidating the loan. Borrowers who are eligible for consolidation can bundle all student loans into a single loan, usually with a new federal lender. Once consolidation is complete, the student loan is no longer in default and there is no longer a risk of an offset. Borrowers may also be able to qualify for payment plans during consolidation such as the Income-Based Repayment Plan (IBR).
  • Rehabilitating the loan. It may be possible to reach an agreement with the lender to make the payment plan affordable and bring the loan current. Loan rehabilitation usually takes 9 months with on-time payments.
  • Repay the defaulted loan in full.


For most people, a tax refund offset can be a significant financial burden. Even after a refund has been offset, it may be possible to get it back with a student loan tax offset hardship refund request. There are many circumstances under which students can qualify for a hardship refund of an offset such as: 

  • Proof of eviction or foreclosure
  • Utility disconnection notice
  • Proof of exhausted unemployment benefits
  • Filed for bankruptcy
  • Totally and permanently disabled

 

Student Loan Forgiveness and Tax Consequences 
Federal student loans come with a benefit not available with private loans: the option for student loan forgiveness. Under some circumstances, federal student loan borrowers may have their outstanding balance forgiven. This option is only available under certain circumstances, however. There are multiple student loan forgiveness programs available such as: 

  • Teacher loan forgiveness. This program is available for borrowers who meet specific teaching requirements.
  • Public service loan forgiveness. This program is available for borrowers who get a job at a nonprofit or government organization, repay the loan based on their income, and maintain their employment for 10 years.
  • Student loan forgiveness for nurses through state and federal programs such as the NURSE Corps program.
  • Income-Based Repayment (IBR) forgiveness. The IBR plan caps payments at 10-15% of the borrower’s discretionary income but the balance is forgiven after 20-25 years of consistent payments.

While loan forgiveness may make sense, there may be tax consequences. The amount of student debt that is forgiven can be transformed into tax debt, a substantial hidden cost to a seemingly clear-cut decision. 

This tax debt usually comes into play with the Income-Driven Repayment plan, which comes with forgiveness of the remaining balance after 20 to 25 years of repayment. Under current IRS rules, any loans forgiven under this program is considered taxable income. If $40,000 is forgiven, for example, the borrower may be left with a $10,000 or more tax bill along with state income taxes. This can force the borrower into a new payment plan with the IRS to pay down the tax debt. 

What Can Borrowers Do About Student Debt? 
According to the Federal Reserve, the average student loan payment is $393 although some borrowers pay much more. Student loan debt can be a substantial burden and make it difficult to qualify for a mortgage or even pay for daily living expenses. Borrowers have many options for combating the financial burden of student debt. 

A financial advisor specializing in student loan debt is one solution to help borrowers better understand their situation and assess their options, including student loan forgiveness, loan consolidation, and repayment plans. Along with repayment plans like an Income-Based Repayment plan, there are strategies that can help pay off student loans faster such as making extra loan payments or paying more than the minimum payment. Refinancing can also be a good strategy to reduce the loan’s interest rate. A refinance pays off the existing loan and replaces it with a new loan at a lower interest rate. It’s even possible to refinance a federal loan into a private loan, although it’s still a good idea to consult with a financial advisor as there may be consequences to this decision such as the loss of repayment plan and forbearance options.

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Which is better for your wallet: Renting or Home-owning?

tax-saving-rent-buy

Making smart choices about your living situation will have a big impact over the long term on your finances. A lot of consumers aren’t sure whether it’s best for them to rent or buy a home in their particular situations. It’s hard to provide a simple rule for which is preferable.

While you build equity in your home when you pay off a mortgage, you also have to handle a lot of additional expenses yourself like property taxes and home repairs. At the same time, you do get to take advantage of some tax write-offs when you’re paying off a mortgage.

For a lot of consumers, whether or not they should buy a home depends on their age and financial situation. Generally speaking, younger consumers are better off renting while older consumers probably want to take advantage of the financial incentives to own a home.

Renting when you’re young
Those who are able to be approved for a mortgage loan need to have relatively good credit and also have built up some savings in order to be able to put a down payment on a home. These things are sometimes not financially feasible for younger consumers. Younger consumers tend to have lower incomes and haven’t been working long enough to acquire as much in savings as older consumers.

Another reason why home ownership is sometimes not possible or the best idea for younger consumers is because younger consumers are more likely to move around. Younger consumers are in many cases still establishing their careers. They are more likely to have to relocate. Relocating can be a big problem once you’ve bought a home because it generally requires you to sell your home.

At the same time, there are quite a few disadvantages to renting that younger consumers who are unable to buy a home just have to deal with. Rent money is lost every month and doesn’t help to build up equity in a property. While there are financial disadvantages to renting, renters also have less responsibility over their properties. They can simply call up the landlord to handle repair needs when necessary and don’t have to foot the bill. For the moment, renting is a less expensive living situation that doesn’t involve as much responsibility.

Enjoying the benefits of homeownership
Once you’re in stable condition financially and you have some savings built up, it’s time to start thinking about home ownership. Before you can even think about it, however, you’re going to have to make sure that your credit score is high enough that you can be approved for a mortgage loan.

Before you buy a home, you need to be actually certain that your income level is not going to face any sudden shocks that will decrease it. You need to be able to count on income coming in well into the future so that you know that you’ll be able to make your mortgage payments. Defaulting on a home loan is a big problems and can devastate your credit for years to come.

When you buy a home, you’ll be able to take advantage that each payment you make will increase your equity in your home. Once you stop making payments, you own a house and you’ll be able to sell it in order to get all the money you put into your house back.

At the same time, you’ll also be able to take advantage of numerous tax benefits as a homeowner. When you’re making payments on a mortgage loan, you get to claim a tax credit for all of the interest you pay on your mortgage loan. There are a few other tax benefits and tax deductions that go along with home ownership. You get to write off the points you pay on your mortgage loan as well as the cost of all the property taxes you have to pay in order to own your home. The other big tax deduction you can claim when you are a homeowner is a deduction for any costs you have had to incur in order to pay for the insurance on your mortgage.

The tax benefits of owning a home are also particularly appealing and applicable to older consumers because older consumers tend to have higher incomes and therefore higher tax liabilities. Younger consumers might not benefit as much from home ownership tax credits because they might not itemize deductions or they may be in lower tax brackets and therefore have to pay a smaller percentage of their income as taxes.

Deciding for yourself
In the end, you must make your own decision on whether you want to rent or buy. If you can afford to buy, it’s generally good to do so if you know you’re not going to be relocating and you know your income is secure.

However, you need to carefully evaluate your options and make sure that you can get a decent mortgage loan with a manageable interest rate before you commit to home ownership.

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Owe Back Taxes? Here Are Your Options

Back taxes are any taxes not paid during prior tax years. The United States Internal Revenue Service estimates 8.2 million Americans owe a combined tax debt of $83 million in back tax debt. Owing back taxes can greatly affect the quality of someone’s life, but misinformation, not being able to pay, and fear of penalties prevents many debtors from contacting the IRS. People who owe back taxes often describe this fear and the looming debt as a weight on their chest or a dark cloud that follows them everywhere. This article seeks to shed some light on not only what can happen when back taxes are not paid, but also provide five ways of settling this debt with minimal damage to the debtor.

When back taxes are owed, the Internal Revenue Service will not hesitate to impose fines, put liens on property, garnish wages, and place levies on bank accounts. Federal laws allow the IRS to garnish up to 25 percent of your wages or the amount of your income that is over 30 times the minimum wage until the tax debt is paid. These laws also allow the IRS to place a levy on a debtor’s bank account, which means the IRS can take all of the money in the account towards the tax debt.

The most direct solution for anyone owing back taxes would be to contact the Internal Revenue Service and get them paid, but it can be next to impossible to pay IRS penalties and afford basic needs. However, it is possible to pay back taxes, avoid the harsher penalties, and live a normal life.

Option #1: File for Currently Not Collectible (CNC) Status

Currently Not Collectible status is available through an IRS financial hardship program. The ideal candidate for CNC status is able to prove he or she has little or no money left after paying basic expenses, such as food, rent, and utilities. CNC status ceases collection for a time so that the debtor can gather the resources to pay the debt. Although CNC provides temporary respite from looming tax debt, the debt does not go away, continues to accrue interest, and the IRS will withhold any future tax refunds towards the debt (commonly known as a refund offset).

Anyone interested in determining if CNC status is a good fit for their situation should first contact a qualified tax professional. The second step is to gather the following documents for your appointment:

  • A monthly list of expenses (i.e. food, rent/mortgage, utilities, child care expenses, student loan payments, alimony and/or child support, transportation, monthly dues, etc.)
  • Three months of bank statements
  • Proof of payment for any unusual expenses, such as medical bills

The tax professional will then guide the debtor through determining his or her disposable income and whether to complete Form 433-A or Form 433-F. The tax professional can also help the debtor develop a plan of action to gather the money owed during this deferment period. Once the forms are submitted, the IRS will then evaluate the debtor’s case and determine if he or she is a good fit for CNC status and how long of a deferment period he or she will have.

Option #2: Set up an Installment Agreement

When an individual owes back taxes, the IRS’s main goal is to collect and will often work with him or her to develop a payment plan. The ideal candidate for a payment plan does not meet the criteria for CNC and the combined debt is less than $100,000. Although the fastest way to set up an IRS installment plan is online, applicants can also do so by phone. Applicants will need the following information when applying for an IRS installment plan:

  • Name exactly as it appears on the most recent tax return
  • A valid email address
  • Address as it appears on the most recent return
  • Date of birth
  • Filing status (i.e. married or single)
  • Social Security number of all parties on the return
  • Transcript and/or PIN from any previous IRS installment plans

Option #3: Make an Offer in Compromise

An Offer in Compromise (OIC) is exactly what it sounds like: a debtor’s offer to the IRS to settle his or her tax debt for less than the amount owed. An ideal OIC candidate will have filed all applicable tax returns, is unable to pay or does not qualify for other options, and has made all tax payments for the current year. Once the amount is agreed upon by both parties, Offers in Compromise can be paid in lump sums or periodic payment offers. The IRS takes the following factors into account when evaluating an applicant for an OIC:

  • Is there doubt or a dispute as to how much is owed?
  • Is there doubt regarding the collectibility of the entire debt?
  • Would collecting the full amount cause the applicant financial hardship?

Option #4: Ask for a Penalty Abatement

For individuals who have never been delinquent on their taxes before, the IRS offers the First Time Penalty Abatement Program. This program allows debtors to receive some relief from penalty fees while paying back taxes. Abatements only cover fees from a single tax period and will only be granted if:

  • Filing a tax return was not previously necessary for the debtor.
  • The debtor has not incurred tax penalties for the three previous years.
  • The debtor has filed all currently due returns or an extension to file.
  • All fees are paid or a suitable payment arrangement has been made.

Option #5: Ask for Full Forgiveness of the Tax Debt

The IRS will grant individuals who owe back taxes full forgiveness of their tax debt, although this is incredibly rare. In addition to demonstrating an inability to pay back taxes owed, an individual who may be a candidate for full forgiveness will have to prove his or her debt is past the statute of limitations. The most common way individuals demonstrate an inability to pay is through Chapter 7 bankruptcy.

Owing back taxes is difficult and anxiety-inducing under the best of circumstances. Individuals who owe back taxes often feel trapped. However, with the help of a qualified tax professional and knowledge of these five options, there is hope for any individual who wants to resolve his or her back tax debt.

 

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Everything You Need to Know About the New Tax Plan

President Trump signed The Job Cuts and Jobs Act on December 22, 2017. The legislation that actually passed is quite different from the promised 35 percent tax cut Trump promised on the campaign trail. In fact, the main beneficiaries of this tax law are taxpayers at the top of the heap, specifically, the top five or six percent as published by Newsweek in the article, Trump’s Broken Promise: GOP Tax Bill Fills Wealthy People’s Pockets, Takes Money from Middle Class, Poor.

Important Changes that Impact a Large Segment of Population

– Eliminates moving expenses except for military personnel
– Eliminates deduction for people paying alimony
– Almost doubles standard deduction
– Limits mortgage interest deduction to $750,000
– Eliminates home equity loan interest deductions
– Repeals Obamacare tax penalty for uninsured
– Tax Bill’s Impact on the Middle Class

Newsweek reports that middle-income earners will see taxes lowered by about 10 percent for about eight years, expiring in the year 2025. According to The Tax Policy Center, middle class taxpayers will reap about $1000 in savings. Essentially, the majority of people who reside in the middle class can count on minimal tax relief, with no net benefit from tax cuts by 2027. Additionally, Trump’s promise for a simpler tax system with fewer tax brackets never materialized in the final bill with the three tax brackets Trump said he’d deliver. The tax code still has the same seven tax brackets as it did before the new law was passed.

Financial Prospects for the Poor Under Current Tax Law

While the poor can claim a tiny tax savings, the amount pales in comparison to the benefits gained by higher earners. The taxpayers that represent the lowest income bracket will see an income increase of .3 percent, according to The Tax Policy Center. As a point of reference, Newsweek reports that the highest income earners are gaining a significant 2.9 percent increase. Considering the drastic difference in the income levels between the top echelon of Americans and the lowest earners, this 2.5 percent difference in income benefits is significant and is why so many Americans and journalists are claiming that this bill helps the wealthiest Americans with little benefit for most of the population.

Tax Law Rewards the Wealthiest Americans

The reason wealthy people are happy about Trump’s Tax Plan is because they win big favoring business owners and wealthy people by significantly lowering corporate tax rates and estate taxes. The top one percent of Americans reap the benefits of estate tax exemptions that are double what they were prior to the passage of this law. In 2026, the rate returns to what it was before the Act passed. Currently, the first $11.2 million for a single person and $27.4 million for a couple are tax exempt from estate taxes.

The corporate tax rates have been lowered from 35 percent to a figure that represents the lowest rate since 1939, 21 percent. The tax benefits awarded to businesses by this plan aren’t limited to C-Corporations. The standard deduction applicable to pass through businesses was raised to 20 percent. This includes sole proprietorships, LLCs, partnerships and S-Corps. Many small and medium-sized businesses fall in this category and are certain to benefit.

Another benefit business owners are reaping relates to writing off depreciation. Trump’s New tax bill allows businesses to take a deduction for the cost of a depreciable asset in one years instead of having to amortize it over a longer period of time. When purchasing large equipment assets, this type of asset offers huge tax benefits, sheltering income from taxation due to write offs immediately.

In spite of the $40 billion increase in the deficit that is expected from the elimination of the corporate AMT, Trump’s tax plan included this big change. The AMT imposed a 20 percent tax rate that automatically kicked in when tax credits reduced a company’s tax rate below 20 percent. The AMT guaranteed that corporations had to pay taxes, even when the number of tax breaks grew so substantial as to almost completely eliminate a company’s tax bill.

Territorial System versus Worldwide Tax System

Trump’s tax plan changed the worldwide tax system to a more lenient territorial system allowing US companies that make money overseas, the tax exemption on that money earned on foreign soil. This change is expected to specifically favor pharmaceutical and technology companies. Aligned with Trump’s campaign promise to bring foreign operating American companies back home, this change is expected to encourage entrepreneurs and business owners to bring the money “back home” to reinvest. The justification for this change is based on the idea that the worldwide tax system encourages businesses to leave their money overseas since the money could not be taxed until it came back into the country.

Tax Impact Changes Related to Dependents

Forbes reports, the Child Tax Credit was increased from $1,000 to $2000. Covered income limits were increased from $110,000 to $400,000. Elderly dependents are also considered with a $500 credit allowed under the New Tax Plan.

Medical Deductions and Changes

Nothing garners more interest in today’s volatile healthcare climate than discussions about medical expenses and healthcare costs. Forbes reports that the deduction for medical expenses actually increased for 2017 and 2018 as the result of lowering the floor to 7.5 percent of income from 10 percent of income for qualification purposes. Considering 8.8 million people benefitted from this deduction in 2015, according to Balance.com, this attractive deduction improvement is certain to be one of the few “winners” in the new tax law that can appreciated by taxpayers across the board.

Summary

After dissecting the details related to longevity and benefits that apply to all citizens, it becomes apparent that the wealthy have reason to celebrate while the middle and lower income earners will barely notice a difference, particularly as prices keep increasing and specifically, in light of higher healthcare costs predicted. As the result of Trump’s targeted attack on Obamacare, which will mean the loss of thousands of participants as the result of eliminating the requirements for uninsured Americans to join, the prices of healthcare are sure to go up, disproportionately harming poor and middle-class Americans.

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Guide to Small Business Income Tax

small business taxes

The spirit of entrepreneurship that drives many to open a small business often comes with a fierce independence and self-reliance. While these are admirable traits and some may say essential for success as a small business owner and operator, they can make one less likely to seek outside guidance and assistance where it could prove beneficial.

If you are contemplating starting a small business or have already embarked on that journey, be certain you fully understand your tax obligations and perhaps more importantly, don’t overpay.

Understand Your Status
One of the basic considerations to realize is how the IRS looks differently at everyone who works for someone else as an employee from those who earn income from a business. You are probably very familiar with earning a paycheck, seeing income taxes withheld each pay period and reconciling everything once a year on April 15 when you file your 1040.

As a small business owner, you will still be required to file 1040, but how you determine the income, or loss, to report, will entail additional tax forms.

Schedule C – The Basic Small Business Income Tax Form

Schedule C is primarily used by a business owner to depict the revenue and expenses of the business and calculate a profit or loss accordingly. Most Schedule C filers are sole proprietors of their business, but other individuals may also be required to file C, such as a single member LLC owner.

Additionally, if you earn income that is reported on a 1099 Form and not subject to withholding, it is most often necessary to file Schedule C. Although a 1099 income earner may not consider herself a business owner, this is where it should be reported, and there are very likely deductible expenses that can offset the income.

One of the primary benefits of small business ownership is to strategically claim write-offs to reduce your potential tax exposure. Depending on the nature and complexity of the business, this can require a sophisticated understanding of the tax code and the percentages and type of deductions other businesses of similar stature claim.

Accounting Fundamentals

Most small business owners know their business quite well and many ultimately learn their economics as well, but preparation of income taxes requires some accounting acumen as well. For instance, Schedule C requires the filer to:

– Elect an accounting method – cash, accrual or other, to be specified.

– For those who sell goods, elect a method to value closing inventory – cost, lower of cost or market or other, to be specified.

–  It probably goes without saying these can be critical decisions in the overall economic health of the business.

Other Forms
In conjunction with Schedule C, a small business owner may be required to file other forms with their incomes taxes. Some or all of these may be required:

Depreciation
– Certain assets have a declining value that can be written off over what is considered the assets’ useful life (use Form 4562) or may be taken all in one year (considered a Section 179 expense.)

Business use of home
– Under certain circumstances, a Schedule C filer may qualify to write off a portion of their home for business purposes. If so, Form 8829 may be required. At one time, declaring business use of the home was considered a red flag likely to catch the IRS’ attention and bring attention to the tax return. Although not as apt to trigger an audit any longer, it remains an area to be carefully considered with a thorough understanding of the tax rules and regulations.

Self-employment taxes
– One of the drawbacks of self-employment is the need to pay all of the taxes earmarked for one’s Social Security pension and Medicare coverage, unlike an employee whose employer pays 50 percent of that total. Aggressively declaring all legitimate expenses as deductions is the best manner to minimize self-employment taxes, which are calculated and reported on Schedule SE.

Estimated Taxes
– Those new to self-employment are often chagrined to find the IRS requires quarterly payments in the current year of what is the anticipated tax liability due on April 15 of the following year. This can be difficult to do, but an accurate estimation is essential. For those who fail to pay or under pay, there are penalty assessments and interest that compounds and adds up quickly. File Form 1040-ES four times a year.

Seek the Guidance of an Experienced Tax Professional

A licensed tax preparer, enrolled agent or CPA can not only assist you in saving money and providing compliance and peace of mind, you will also save valuable time, which can be better put to use running your business.

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Success: Real Results from Tax Group Center

At Tax Group Center, we are committed to providing our clients with results. Clients who retain our services in order to address their delinquent tax returns and debt often come to us in a time of crisis. To best protect their financial interests, it is essential that we evaluate the client’s particular situation and determine the appropriate compliance or tax resolution program to file with the IRS or State Taxing Authority in a timely manner. The cooperation of our clients is vital to our success. Several documents must be submitted to our legal department in order for them to determine the best course of action in handling a client’s tax situation. Form 433A/B is absolutely required by the IRS for resolution qualification. This form outlines your income and expenses which will ultimately determine which resolution program is right for you. If you are a current client, please be sure to fill out this form to the best of your ability and return it back to us as quickly as possible. No work can be done on your behalf until this form is completed. Other supporting documents such as bank statements or proof of insurance may be required as well.

There are several types of tax resolution programs available depending on your qualifications, these include:

Offer in Compromise (OIC)

A settlement of the tax liability for less than the total amount owed

Penalty Abatement
Forgiveness of penalty fees

Installment Agreement (IA)
Small payments of the total tax liability paid over time

Currently Non Collectible (CNC)
Places the tax liability on hold during which time, collection activities and levies are halted

Innocent Spouse
Relieves responsibility of tax debt, interest and penalties associated with your spouse

Levy Release/Modification
Removes or reduces seizure of assets

Wage Garnishment Release/Modification
Removes or reduces seizure of wages

 

For more information on qualification and other details of these programs please visit our website: www.taxgroupcenter.com.

Tracking our results is a tool that we use to ensure that we are providing the best service to our clients and allows our new clients to see “the light at the end of the tunnel”. We understand that our clients have certain expectations when it comes to their particular case and we want to ensure that those expectations are met or even exceeded. Each month, we determine the total number of tax resolution programs our Enrolled Agents and Attorneys were able to get accepted by the IRS or State. In this way, we can track the effectiveness of our staff and ensure that our clients are achieving their goals.

Example of an Enrolled Agent’s Monthly Results:

Type of Resolution Achieved Number of results
433 42
CNC 10
I/A 15
OIC 18
Wage Garnishment Modified 9
Levy Modified 5
Innocent Spouse 0
Penalty Abatement 5
Total 104

 

Again the results achieved are based on individual circumstances. Our team of professionals evaluates a number of factors to determine which tax resolution program is most likely to be accepted by the IRS or State Taxing Authority. Timely return of all requested documents is essential to starting the process. Keep in mind that programs such as the Offer in Compromise can take up to several months to complete.

We’re working to help an even greater number of clients each month in the future. By constantly evaluating our performance and streamlining our protocols, we’re striving to be the most effective tax service company in the industry. Delivering results for our clients is our business.

If you’re a Tax Group Center client that recently received a successful resolution, we’d love for you to share your experience. When you contact us to give your testimonial, in return for your feedback we’ll send you a $50 gas card! Know someone with unresolved tax issues? Refer them to Tax Group Center. We consider it the highest compliment when our clients are pleased with our work and go on to share their experience with others. Call today to find out about our referral program!

Tax Group Center: Service. Solution. Success.