Lowering Student Loan Payments Through Tax Strategies - 12-15-24

There are roughly 42.7 million federal student loan borrowers as of Q4 2024, creating an opportunity to provide additional insight to your clients beyond tax preparation. By leveraging certain tax and repayment strategies, you can help your clients reduce their tax liability and lower their student loan payments in one strategic swoop. Listen in to learn how...

Created from the Caitlin See, MPA article posted 12-15-24

This podcast is meant for entertainment purposes only. For the more thorough, complete, and accurately written version of this article which includes citations, visit us at http://www.tottb.tax

Transcript

Welcome back everybody to another deep dive. Today, we're focusing on something, especially relevant if you're a tax professional. Oh, yeah. So CPAs, EAs, accountants, anybody who helps clients navigate that wonderful world of taxes. Absolutely.

We are gonna be exploring ways you can help clients lower their student loan payments by using some smart tax strategies. That's good. You're gonna walk away with knowledge that'll help you go beyond basic tax prep Yeah. And really solidify yourself as a trusted financial advisor for all your clients. Love that.

So are you ready to dive in? Absolutely. Let's get into it. Alright. So first things first, we're talking about helping clients who are dealing with student loans and specifically those on income driven repayment plans.

Right. So is there a connection between taxes and these IDR plans that we can leverage? Yeah. There is, and it's actually pretty straightforward. Okay.

The Department of Education uses your client's adjusted gross income or their AGI Okay. From their latest tax return to calculate their monthly payments under these IDR plans. So what you're saying is if we can strategically lower a client's AGI, we can potentially lower their monthly student loan payments. Precisely. That's a game changer.

And that's where your expertise as a tax professional is so valuable. Yeah. You're not only minimizing their tax liability, but you're also helping them gain control over their student loan debt. Okay. I see the potential here.

It's a win win. But let's get specific. Yeah. What are some actual strategies our listeners can use to achieve this AGI reduction for their clients? Let's start with something you're already familiar with, retirement contributions.

Okay. Encouraging clients to max out contributions to pretax retirement plans like 401 k's, 403 b's, 457 plans, and traditional IRAs. Okay. Yep. Those are the bread and butter of tax planning.

Absolutely. But remind me, why are we emphasizing pretax contributions here? Because those are the ones that directly reduce AGI leading to lower student loan payments. Okay. Roth contributions, while excellent for long term growth, don't offer the same AGI reduction benefit Got it.

Since they're funded with after tax dollars. So for clients struggling with student loans, traditional retirement plans are probably gonna be the more strategic choice. Yeah. I'm guessing there's more to the story than just that, though. Right?

Right. Another powerful tool is the health savings account or HSA. Yeah. You're already aware of the triple tax advantage contributions. Growth and distributions are all tax free.

Yeah. But what's often overlooked is that HSA contributions also lower AGI. So it's a win for both their health care and their student loan situation. Exactly. That's fantastic.

But hold on. Are there some eligibility requirements for HSAs? Yes. Can anyone just contribute? Good point to contribute to an HSA.

Your client needs to be enrolled in a high deductible health plan or HDHP. Okay. But for those who qualify, it's an incredibly powerful savings vehicle. Okay. So we've got retirement contributions and HSAs, both excellent ways to lower AGI and in turn, potentially reduce those monthly student loan payments.

Right. What other strategies can we add to our arsenal? Let's not forget about flexible spending accounts or FSAs. FSAs allow for tax free contributions and distributions just like HSAs, and they can also contribute to lowering AGI, but there's a catch. There's always a catch.

Isn't there late, Ami? FSAs work on a use it or lose it basis. Okay. So it's crucial to guide your clients to contribute only what they're confident they'll spend within the year. Yeah.

Over contributing could lead to forfeiting those funds. That's a good point. Nobody wants to lose money because of overzealous FSA contributions. Right. Before we move on, let's talk about the student loan interest deduction that seems relevant here, doesn't it?

It absolutely is. Your clients can deduct up to $25100 in interest they paid on either federal or private student loans. Okay. And this deduction is available even if they don't itemize. That's huge.

So even clients taking the standard deduction can benefit. Exactly. It's a valuable tax break that's often overlooked. Oh, wow. But there are some nuances to keep in mind.

Okay. You picked my interest. What are these nuances we need to be aware of? 1st, the deduction starts to phase out based on the taxpayer's modified adjusted gross income or MGI for single filers. The phase out range for 2024 is 80,000 to $95,000.

Okay. For joint filers, it's a 165,000 to a $195,000. So for those clients whose income falls within those ranges, the deduction will be reduced. And if it's above the range, they won't be eligible at all. That's right.

And another important point, the deduction isn't available for those who are married filing separately. Good to know. We need to be mindful of those filing statuses when advising our clients. Absolutely. But what about those clients who've consolidated their student loans, say, to take advantage of the public service loan forgiveness waiver or the IDR account adjustment?

Their 10.98 e's might show capitalized interest from that consolidation. How do we handle that? That's a great question and something many tax professionals might overlook. The good news is that the IRS considers that capitalized interest as regular interest for tax purposes. So as your client makes principal payments on the consolidated loan, that capitalized interest becomes deductible.

So it's not loss, just deferred. Exactly. It seems like we've covered quite a few strategies for lowering AGI and, potentially, reducing student loan payments. But can we make this a bit more tangible for our listeners? I think a real world example would really drive the point home.

Absolutely. Let's introduce a hypothetical couple. Thomas and Brenda, they're married, have 2 kids, live in Texas, and file their taxes jointly. Thomas has a significant amount of federal student loans, about $125,000, and he's enrolled in an income based repayment or IBR plan. Okay.

So they're facing a pretty common scenario these days, but how does their AGI impact their monthly payments under this IBR plan? Well, since Thomas took out his loans after July 2014, his IBR payment is calculated as 10% of their discretionary income. Okay. Let's assume their AGI is a $100,000. A $100,000 AGI.

So how do we figure out their monthly payment from there? We have to factor in the 20 24 poverty guidelines for a family of 4 in the contiguous US. The federal poverty line or FPL deduction under the IBR plan is $46,800. So we subtract that from their AGI? Exactly.

Which means their discretionary income comes out to $53,200, and 10% of that translates to a monthly IBR payment of $443. Wow. That's a significant chunk of their budget. It is. But imagine if with your guidance, Thomas and Brenda decide to boost their retirement contributions.

Let's say they contribute $8,000 for the year, and they also decide to contribute $4,000 to an HSA recognizing the importance of planning for health care costs. But now we're talking of coactive financial planning, not just focusing on taxes in isolation. I like it. What happens to their AGI and student loan payments with these contributions? Their AGI drops to $88,000.

They still receive the same FPL deduction of $46,800, but their discretionary income shrinks to $41,200. Yep. This brings their monthly IBR payment down to $343. So just by making those contributions, they've managed to free up over a $100 per month, and they're making progress towards the retirement and health care goals at the same time is a powerful illustration of how these strategies can work in real life. But what if Thomas and Brenda really commit to maximizing these strategies?

Yep. Now we're talking let's say they've paid down their consumer debt and are ready to amp up their savings. They commit to contributing $20,000 annually to retirement and $5,000 to their HSA. What do you think happens? Well, their AGI would plummet, which would dramatically reduce their discretionary income.

Right? You got it. Their AGI would be 75,000 dollars, which means their monthly IBR payment would drop to a mere $235. That's a difference of over $200 per month compared to their initial situation. That's incredible.

We've gone from a $443 payment down to $235 just by strategically leveraging these tax advantaged accounts. And that's the beauty of it. You as the tax professional are in a unique position to guide your clients towards these kinds of outcomes. This is truly insightful stuff, but we've covered a lot of ground already, and I'm sure there's still more to unpack. Let's continue this deep dive into student loan repayment and tax optimization in the next part.

Stay tuned, everyone. Sounds great. Yeah. Welcome back to the deep dive. Before we went to the next section, we were walking through a hypothetical scenario with Thomas and Brenda.

Showcasing how strategic financial decisions could potentially lead to substantial savings on their student loan payments. It's pretty eye opening to see how much of an impact we as tax professionals can have. Yeah. But I think many of our listeners might be wondering how to approach these conversations with their clients. Right.

It's one thing to know the strategies, but another to actually implement them. That's an excellent point. Remember, it's not just about crunching numbers. Yeah. It's about truly understanding your clients' financial goals, their risk tolerance, and their overall comfort level with making these types of financial decisions.

It's only being a financial therapist as well as a tax adviser. You could say that take retirement contributions, for example. Right. Some clients might hesitate to increase their contributions because they're concerned about a smaller paycheck now even if it means potential long term gains and reduced student loan payments. That's where clear communication and education come in.

Right? Precisely, we need to help clients understand the trade offs. Yeah. The short term versus long term implications of their choices. It's about empowering them to make informed decisions that align with their overall financial goals.

I'm curious. Are there any other creative strategies we can consider for our clients besides the ones we've already covered? There are one interesting approach is income shifting. Okay. This strategy involves strategically moving income from a higher earning taxpayer to a lower earning taxpayer, typically within a family.

So for example, if one spouse earns significantly more than the other Right. They could potentially shift some of that income to the lower earning spouse, reducing their overall tax liability and potentially impacting their student loan payments as well. You've got it now. Income shifting can be complex. Sure.

And it's critical to ensure everything is done legally and ethically with full transparency. Of course, that goes without saying. Yeah. But for certain clients, this strategy could be quite valuable. Right?

Absolutely. It's not a one size fits all solution, but it's definitely a tool worth considering. Another area to explore is optimizing deductions. We already talked about the student loan interest deduction, but there are many other deductions that can lower AGI. Deductions are our friends.

What are some specific ones we should be thinking about in this context? Think about deductions for medical expenses, charitable contributions, or even certain business expenses depending on your client's situation. So it's all about finding those hidden gems in the tax code that can benefit each client individually. Exactly. It's like a puzzle.

Right. Figuring out which pieces fit together to create the optimal outcome. But remember, the tax landscape is constantly evolving. Oh, for sure. So staying informed is crucial for us as tax professionals.

Continuing education is a must. That's for sure. I try to attend at least a couple of industry conferences every year to keep myself updated. That's a great approach we need to stay ahead of the curve to serve our clients effectively. Are there any recent developments in the world of student loans and taxes that you think our listeners should be aware of?

I'm glad you asked. There's been a lot of talk lately about potential changes to the existing income driven repayment plans. There's even a possibility of new IDR plans being introduced. It seems like the rules around student loan repayment are always in flux. Yeah.

Which makes our role as advisors even more critical. Absolutely. Our clients need us to be their guides through this complex terrain. I agree. Before we wrap up, I wanna circle back to something we touched on earlier.

Okay. The emotional aspect of financial planning, it's so important for us to approach these conversations with empathy and understanding. We need to create a safe space for our clients to share their concerns and aspirations. It's not just about the numbers. It's about building genuine relationships with our clients.

Right. You hit the nail on the head. We need to remember that we're dealing with real people Yeah. Who are facing real financial challenges by creating a supportive environment. We can empower them to take control of their finances and move towards a brighter future.

I love that perspective. It really elevates our role as tax professionals, taking us beyond just tax preparation and into the realm of true financial advocacy. I couldn't agree more. As we head towards the final part of our deep dive, let's leave our listeners with some actionable takeaways. Great idea.

What are some concrete steps our listeners can take to implement these strategies and better serve their student loan clients? The first step is simply to start the conversation. Don't be afraid to bring up the topic of student loans with your clients Okay. Even if it seems outside the traditional scope of tax preparation. I think many tax professionals might hesitate to do that.

Yeah. But you're right. It's all about expanding our services and providing holistic guidance. Exactly. You might be surprised by how many of your clients are struggling with student loan debt and would welcome your support.

And once you've initiated the conversation, active listening is key. Right. Really take the time to understand your client's unique situation, their goals, and their concerns. That makes a lot of sense. Don't assume a one size fits all approach because every client is different.

I'm glad you brought that up. It's so important to remember that each client's financial plan needs to be tailored to their specific needs and circumstances. We've covered a lot of ground today, and I know it can feel a bit overwhelming to try to implement all of these strategies at once. Yeah. Where do you suggest tax professionals start?

Start small focus on 1 or 2 strategies that resonate with you and that you feel confident implementing as you gain experience and expertise. You can gradually expand your repertoire. That's great advice. And, of course, we need to emphasize the importance of continuing education. Yes.

The tax code is constantly changing, and we need to stay up to date to provide the best possible service to our clients. I couldn't agree more. Being a tax professional is a journey of lifelong learning. It's about constantly expanding our knowledge and refining our skills to better serve our clients and help them navigate the complexities of the financial world. We've explored the connection between taxes and student loan payments, uncovered some powerful strategies for lowering AGI, and emphasized the importance of empathy and a client centered approach to financial planning.

It's been an insightful discussion so far, and I hope our listeners are feeling inspired to take this knowledge and make a real difference in their clients' lives. But we have one more section to go stay with us. Welcome back to the Deep Dive. We've been exploring how you as tax professionals can help your clients who are burdened with student loan debt. Right.

It's not just about tax preparation. It's about providing a higher level of service and becoming a true financial advocate for your clients. Exactly. Think about the relief you can provide to your clients. Yeah.

They might walk into your office feeling overwhelmed by those student loan payments, unsure of what to do. Right. But with your expertise, you can help them create a plan, a clear path forward. You'll equip them with the knowledge and strategies to manage their debt effectively and make progress towards their other financial goals. That's what makes this profession so rewarding.

It's about empowering people to take control of their finances and build a better future. Absolutely. But it also means we need to stay ahead of the curve, constantly learning and adapting to the ever changing tax and financial landscape. Couldn't agree more. Continuing education is essential for tax professionals attending industry conferences, reading relevant publications, participating in webinars.

All of these things help us stay sharp and informed. And let's not forget about the power of technology. Technology can be a game changer. Tax software, financial planning tools, client portals. Yeah.

These innovations can streamline our workflow and free up more time for us to focus on building those crucial client relationships. It's all about finding the right balance between leveraging technology and fostering those human connections. Clients need to feel heard and understood, and that personal touch is irreplaceable. Absolutely. We're not just number crunchers.

We're advisors, counselors, and sometimes even therapists. Right. We're there to guide our clients through the complexities of the financial world, providing support and expertise every step of the way. Will said, as we conclude this deep dive, I wanna leave our listeners with a final thought. The knowledge and skills you possess as tax professionals have the power to make a real difference in people's lives.

Absolutely. You can help your clients alleviate financial stress, achieve their goals, and build a brighter future. Embrace that power. Use it wisely and continue to make a positive impact. Beautifully put thank you to our expert for joining us today and sharing all these valuable insights.

And to all of our listeners out there, thank you for joining us on this journey. We hope you found this deep dive informative and inspiring. And remember, you're not just preparing taxes, you're shaping financial futures.