Tax season is underway. This year’s income tax return is due on April 15. Many of you may have already filed your taxes or are in the process of filing them. You may have undergone some major life changes in the past year like being financially impacted from the coronavirus pandemic, moving for a new job, saving for retirement or education, or juggling a new business.
Before you submit your tax return, you’ll want to consider if those lifestyle changes make you eligible for one of several credits or deductions.
Individual Retirement Arrangements (IRAs)
Contributed to a retirement fund? In general, contributions to a traditional IRA are tax deductible. For the 2020 tax year, the maximum contribution to an IRA is $6,000 for individuals younger than 50 or $7,000 for people age 50 or older. Typically, you must make these contributions prior to end of year, however, if your contributions are made before April 15, 2021 and are specifically designated as a contribution for the previous tax year, then you can take the deduction on your 2020 tax return.
The rules can be a little tricky to navigate especially for those considered active participants in an employer retirement plan such as a 401(k). For more information on IRAs, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).
Contributing to a savings account is a healthy financial habit for people of all ages. The sooner you start, the better. The large majority (91%) of young adults between 22 and 35 are saving according to Money Under 35, a study conducted by Navient and the global market research company Ipsos. Thirty-three percent of them say they are saving for retirement.
If you’re one of them, you can earn more savings when it’s tax time. So, here’s what you need to know: individual filers with an adjusted gross income of $32,500 or less can claim a credit of up to $1,000. While joint filers with an adjusted gross income of $65,000 or less can claim a credit of up to $2,000.
American Opportunity Tax Credit
Are you a student? The American Opportunity Tax Credit (AOTC) is a per-student, partially-refundable tax credit. You can claim a credit of up to $2,500 for tuition, fees, and educational materials in the first four years of post-secondary education. You can also claim the credit for those expenses paid for a spouse or dependent. The credit is phased out for individual filers with a modified adjusted gross income between $80,000 and $90,000, or $160,000 and $180,000 for joint filers.
Student Loan Interest Deduction
If you had student loans and paid interest on them, you may qualify for a tax break. You can deduct up to $2,500 for interest paid on qualified federal and private student loans. To be eligible for a full or partial deduction, an individual filer’s modified adjusted gross income must be less than $85,000, or $170,000 for joint filers.
For borrowers with loans serviced by Navient, filers may securely download their Form 1098-E from their online account. Navient customers who paid $600 or more in eligible student loan interest will be sent the statement automatically. (If you have a federally owned loan, you likely paid less interest in 2020 due to the interest rate being temporarily set to 0% for much of the year.)
Lifetime Learning Credit
If you went to school and don’t qualify for the AOTC, you may want to consider the Lifetime Learning Credit (LLC). Unlike the AOTC, the LLC applies only to qualified tuition and fees. For tax year 2020, the maximum credit is $2,000. The credit begins to phase out at a modified adjusted gross income over $59,000 for individual filers, or $118,000 for joint filers.
Self-Employment Expense Deductions
Are you a business owner? If so, you could be eligible to deduct some business expenses. You may be wondering, “What can I deduct?” Expenses qualified as “ordinary” and “necessary” are eligible. According to the IRS’ website, ordinary expenses are costs that are common in your line of business. Necessary expenses are costs that are appropriate or helpful for your trade. For more information, see “Deducting Business Expenses.”
It’s a good idea to find out if you’re eligible for these tax breaks and what’s best for you by speaking with your tax adviser. If you find that you qualify for these tax breaks, you’ll most likely be able to lower your taxable income.
Next, you might ask yourself, “What will I do with my tax refund?” Some of our customers have used their tax refunds on their student loans to help shorten the life of the repayment process. Kerry from New Jersey says she participated in our Auto Pay program and used her taxes to make additional payments.
I really tried to stay on top of my student loans. I set up automatic payments and set two other automated processes for myself. If I had met my savings goal for the year, I’d make an end-of-year payment, 10% of what I had saved, to pay down my loan; and I’d use 10% of any tax return funds to make another additional payment.
It took discipline, doubling up on payments and tax returns to help Michael from Kentucky, pay off his student loans.
I doubled up my payments each month and used my annual tax returns to pay off big chunks of the loan. It’s all about disciplining yourself to get it paid off.
Stephanie from Kansas is all about setting a budget and allocating extra money from bonuses and tax refunds to student loans.
Try to make more than the minimum payment. Even if it’s rounding up by $10. Every little bit helps. As you come into bonuses, commissions and tax refunds apply them to your student loans.
As the deadline approaches, make sure to understand your tax break options. For more information on the various education deductions and credits available, see IRS Publication 970, Tax Benefits for Education.
In the end, every bit of extra cash you put towards your student loans can help save money in the long run. Knowing the options available at tax time is just another way to make your money work harder and pay off your student loans faster.
Brianna Huff is the communications specialist for Navient, who uses her tax refund to pay down her student loan debt and save for rainy days.