Paying off your student loans requires several considerations: the tax regulations that will apply to you. Some tax regulations can have an effect on student loan defaulters. Just as well, some valid tax breaks can provide some reduction in your taxes when it is time to file them. It is usually best to keep to a defined and strategic repayment plan or collaborate with your employer to organize an income-based repayment plan. This, of course, requires the help of an expert tax preparer.
As a business owner with student loans to pay off, the good news is that student loans repayment is a tax-free employee benefit. In addition, many business owners are already aware of some tax breaks they can enjoy from their business–if they operate their tax preparations strategically.
Recent changes in the American tax system have created an opportunity for student loan borrowers; in that, the postponement of debt payment has further been extended. On December 22, 2021, President Biden extended the pause on federal student loan repayments for an additional 90 days, right up till May 1, 2022. This 90-day extension means that payments and interest accrual will be deferred to ease debtors in current trying times.
However, the reprieve does not cover private student loans. Instead, it simply means that there would be no interest payment deductions for any federal student loans while the suspension is in place.
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Reduce the burden of student loans efficiently
Student loan debt is a substantial financial burden for many people since it takes years to pay off, especially when combined with tax deductions.
In the corporate world today, this burden is borne by the debtor and the employer, who is also a beneficiary of the American educational system and the qualification of employees.
Since the beginning of the global pandemic, this has become even more so, which necessitated a dire need for employers’ assistance to student loan borrowers.
Whether as a student loan debtor or an employer, it is essential to know how best to benefit from the situation, especially the government’s reprieve on student loan repayment at the moment.
New opportunities to write off student loan debts
From the 2021 tax year, student loan debtors could write off up to $2,500 of paid interest. The recent development presents an opportunity for employers tasked with some of the burdens of student loan repayment owed by their employees.
In the next four months of reprieve, repaying student loans would be done without interest accrued and also tax-free.
All debt repayment would simply serve to take a chunk out of the direct principal owed, thereby reducing the debt burden faster. This would mean a high possibility of writing off their loans in the shortest time for some individuals.
Furthermore, the tax-free benefit makes student loan repayment assistance even more profitable for the business owner and the income earner.
Employers can provide up to $5,250 yearly in tax-free compensation to their employees under a qualified educational assistance program from now until 2025. Also, this educational assistance provided must be included in the employee’s taxable income.
This provision is seen under the CARES Act and CAA, which modified the Section 127 tax-free educational assistance program. Before modification, student loan repayment assistance did not qualify as an eligible tax-free benefit under Section 127. Prior eligible expenses included books, equipment, fees, supplies, and tuition.
Finally, in a bid to pay off student loans, it must be known that a worker or employer’s action or inactions can affect the tax situation. As a result, it’s important to know what regulations apply and when exceptions are created.
For instance, within the 90-day extension, there has been a massive decline in repayment by loan borrowers. That is, federal student loan borrowers have not been making payments, which might result in a strain come May 2022, when it is time to resume repayment.
The intelligent action would be to keep repaying student debts when interests are excluded within these few months. Employers would also do well for themselves by providing more assistance to repay student loans in a more convenient time frame.
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Headed by Shauna A. Wekherlien (CPA, Masters in Taxation, and Certified Tax Coach), Tax Goddess is a tax and accounting firm that specializes in tax reduction, audit assistance, and accounting services. As a top 1% CPA in the US, what sets us apart from other CPA’s is our cutting-edge system in which our team of professionals, we are a team of experienced tax professionals who will work with you to develop a customized plan to reduce your taxes while creating the most-effective financial plan possible.
Over the past twenty years, we have helped individuals and business owners from across the US keep more of their hard-earned income by saving a total of $423,984,402 and counting.
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