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Your adjusted gross revenue (AGI) is used as a place to begin to assist decide your total tax legal responsibility every year. But it surely additionally serves as one of many main elements when calculating your federal scholar mortgage fee below an income-driven repayment (IDR) plan.
There are a selection of methods to successfully cut back your AGI, and in flip, decrease each your tax invoice and your scholar mortgage fee. Right here’s how.
What’s adjusted gross revenue?
Your AGI is principally your whole gross revenue for the 12 months after making changes for sure tax deductions.
Gross revenue combines all kinds of revenue acquired for the 12 months, together with:
- Wages,
- Enterprise revenue,
- Dividends,
- Capital good points,
- Retirement distributions,
- And different types of revenue.
Earnings changes embrace particular “above-the-line” tax deductions, equivalent to scholar mortgage curiosity and retirement contributions. In plain phrases, your AGI is calculated as:
Complete gross revenue – “Above-the-line” deductions = AGI
Nonetheless, not all tax deductions are thought-about “above-the-line”. For instance, deductions for medical bills and mortgage curiosity are thought-about “below-the-line” tax deductions and may solely be claimed if you happen to itemize your tax return (which most individuals don’t as a result of the usual deduction is so excessive now).
An itemized deduction finally ends up decreasing your taxable revenue, which lowers your total tax legal responsibility. However they received’t have an effect on your AGI calculation.
This is a vital distinction to grasp as a result of your AGI has a direct relationship together with your federal scholar mortgage fee: the decrease your AGI, the decrease your month-to-month fee.
How AGI impacts scholar mortgage funds
The Division of Schooling provides a variety of reimbursement plans to federal scholar mortgage debtors, together with 4 income-driven reimbursement plans. Every of those IDR plans makes use of a unique share of your discretionary revenue (starting from 10% to twenty%) and has a unique goalpost for accessing scholar mortgage forgiveness advantages (20 to 25 years).
Nonetheless, all the IDR plans work the identical by way of utilizing your AGI and household dimension to find out your month-to-month fee.
The federal authorities makes use of your discretionary revenue to calculate your monthly payment. Discretionary revenue takes your earlier 12 months’s AGI and subtracts 150% of the federal poverty line for your loved ones dimension.
For instance, let’s say your AGI is $100,000 and you’ve got a household of 4. The 2021 poverty line for a four-person family is $26,500. Due to this fact, your discretionary revenue can be $60,250 for the 12 months.
From there, your discretionary revenue is multiplied by the suitable share based mostly on the IDR plan you’re enrolled in. That quantity is then divided by 12 to find out your last month-to-month fee quantity.
Utilizing the identical instance, let’s say you’re enrolled within the Revised Pay As You Earn (REPAYE) plan that makes use of 10% of your discretionary revenue. Your month-to-month fee can be about $502.
However what occurs if you happen to might strategically decrease your AGI by $15,000? Your new fee would drop to roughly $377 per 30 days.
Use our Income-Based Repayment Calculator to shortly plug in your individual numbers and see how decreasing your AGI might have an effect on your scholar mortgage fee.
Strategically cut back your AGI for decrease scholar mortgage funds
Lowering your AGI is the best approach to decrease your federal scholar mortgage fee (the choice is to extend your loved ones dimension). Happily, there are a handful of methods that may make a serious dent in your AGI, whereas additionally benefiting you for the long-term.
Listed here are a number of methods to cut back your AGI by utilizing “above-the-line” tax deductions to your benefit.
Enhance your pre-tax contributions to your retirement plan
Any contributions made to a pre-tax retirement plan will decrease your AGI and assist set you up for retirement later down the highway. This contains contributions made to a 401(okay), 403(b), authorities pension fund or a standard Particular person Retirement Account (IRA).
Observe: It doesn’t embrace Roth IRA contributions since that sort of retirement plan entails after-tax {dollars}.
If in case you have entry to a 401(okay) together with your employer, you possibly can considerably cut back your AGI by maxing out your contributions every year. For 2021, the utmost restrict is $19,500.
You even have the choice to max out a standard IRA at $6,000 per 12 months no matter whether or not your employer provides a retirement plan.
That’s a mixed $25,500 that you could shave off your AGI by focusing in your retirement financial savings. That quantity could be even greater if you happen to’re married as a result of your partner can contribute to their very own IRA or employer-sponsored retirement plan.
Contribute to a Well being Saving Account (HSA)
If in case you have a excessive deductible well being plan (HDHP), you may make tax-deductible contributions to an HSA for future medical bills. HSA accounts provide tax-deferred progress and tax-free withdrawals (when used on certified medical bills). However they will additionally prevent cash by decreasing your AGI, and thereby, decreasing your scholar mortgage fee.
For 2021, you possibly can contribute as much as $3,600 when you’ve got self-only HDHP protection or as much as $7,200 for household HDHP protection.
Declare the coed mortgage curiosity deduction
Personal and federal scholar mortgage debtors can deduct as much as $2,500 of paid curiosity on their certified scholar loans. Nonetheless, the student loan interest deduction has modified adjusted gross revenue (MAGI) limits.
In case your MAGI is $85,000 or extra ($170,000 or extra for married submitting a joint return), you then received’t qualify for this tax deduction. Nonetheless, in case your MAGI is lower than these parameters, you may be eligible to say the complete deduction or a partial deduction based mostly on phaseout pointers.
Use our Student Loan Interest Deduction Calculator to see how a lot you would save in your taxes, together with how phaseout eligibility necessities will affect you.
Declare the tutoring and charges deduction
If you happen to, your partner or a dependent was enrolled in faculty the earlier 12 months, you would possibly be capable of declare the tuition and fees deduction for any paid certified schooling bills.
This deduction has MAGI limitations and a phaseout, as effectively. However when you’ve got a MAGI lower than $80,000 (or lower than $160,000 if married submitting a joint return), you then may be eligible to say a deduction as much as $4,000.
Observe: The way forward for this deduction is not sure. It was beforehand eradicated by the Tax Cuts and Jobs Act in 2017, however was retroactively renewed and prolonged by the 2020 tax 12 months.
Bills that aren’t included in AGI
As talked about earlier, some tax deductions decrease your total tax legal responsibility, however they received’t affect your AGI or your scholar mortgage fee. Nonetheless, it’s nonetheless useful to grasp potential deductions for:
- Charitable contributions
- Mortgage curiosity
- State and native revenue, gross sales and property taxes
- Medical prices
Consider these “below-the-line” deductions require you to itemize your tax return. Most individuals declare the usual deduction ($12,550 for single and $25,100 for married submitting collectively). But when your whole eligible mixed bills exceed the usual deduction, it can save you cash by monitoring and itemizing these deductions.
Plan forward on your taxes and scholar loans
If in case you have a considerable amount of federal scholar mortgage debt, then your taxes and scholar loans ought to go hand-in-hand.
That is particularly the case if you happen to’re pursuing Public Service Mortgage Forgiveness or total IDR forgiveness. Save as a lot cash on funds as potential, and obtain the most important forgiveness profit ultimately.
If you happen to want tax prep assist that elements in your distinctive scholar mortgage state of affairs, we advocate utilizing Student Loan Tax Experts. You should definitely point out Pupil Mortgage Planner as your referral supply to obtain a free 30-minute seek the advice of and low cost.
Nonetheless, if you happen to want a long-term technique for paying off your scholar loans, our group of scholar debt specialists are right here for you. We’ll create a customized repayment plan that can assist you maximize your funds by taking a look at all angles of your monetary, private and profession objectives.
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