Student Loans and “The Tax Man”
Started getting those tax docments arriving in the mail? Remember that the income-driven repayment plans (like Income-Based Repayment and Pay As You Earn) limit a borrower's student loan payments to an affordable level given his or her income. Monthly payments are determined based on the borrower’s Adjusted Gross Income (AGI) and family size.
To maximize the allowable reductions or adjustments from your total income:
• Save for retirement. The best way to boost your adjustments is to save for retirement. Try to make the maximum contribution to your 401K retirement plan or traditional IRA. Your contribution reduces your income, lowers your tax bill, and at the same time lowers your monthly student loan payment.
• Use health savings accounts if your employer offers them (these are known as flexible spending accounts or FSA).
• Avoid using the IRS 1040A or 1040EZ forms and opt for the 1040, because only the 1040 allows you to maximize adjustments to your income.
• Consider getting advice from a qualified professional tax advisor.
