Monthly Archives: February 2017

How To Repaying Student Loans

Your college diploma is a little piece of paper with a big impact on your financial future. Unfortunately, so is your student loan promissory note.

Now that you’ve graduated, it’s time to pay the piper for the loans that have been putting you through school all this time — and playing dumb or pleading ignorant isn’t going to cut you any slack. Here’s what you need to know to pay back what you owe and protect your financial future.

Figuring out what you owe

Most federal loan programs offer a grace period of between six and nine months after graduation before your repayment period begins. Knowing when the repayment process begins and making sure that your lender has a current address for you is crucial. Missed payments can heavily impact your credit score and could result in a number of nasty fiscal consequences including additional fees, losing your federal and state income tax refunds to the government and wage garnishment.

Get ready to start the repayment process by boning up on what kind of loans you have, who your lender is, how much you owe, how long you have to pay it back, what you should be paying each month, and what fees you’re responsible for. To find out where you stand:

  • Dig up all the paperwork related to your loan, including the promissory note you signed at the beginning. If you don’t have it immediately on file, ask your parents, who may have been smart enough to file it all away. Or you can download a copy of your note at the Department of Education’s Federal Student Aid website.
  • Log on to the Department of Education’s Federal Student Aid website if you haven’t already. By entering in some personal information and your Department of Education PIN, you can access a list of what you owe on all your federal student loans. (Note: If you don’t have a PIN already, you may request one at the site.)
  • Contact your university’s financial aid office. A counselor will be able to provide information on private, nonfederal loans that have been disbursed to you through the university so that you can get in touch with your lender. If you have private loans on top of federal ones, reach out to those lenders directly to make sure that you’re fully aware of your payment responsibilities.

Picking a repayment plan

Although your student debt is just as serious as, say, your electric bill or your rent, you generally have more flexible options for repayment. Before your grace period ends, work with your lender to find the easiest plan to pay back what you owe without going broke:

  • Standard repayment. The most direct method of paying off your student loan, a standard repayment plan expects you to pay a fixed amount, at least $50, each month. You’ll also have up to 10 years to pay off the loan. Although your monthly payments will be slightly higher than they would be under the other repayment plans, you’ll wrap up the debt more quickly, which means you’ll pay less in interest.
  • Extended repayment. As with the standard repayment plan, you’ll still pay a set amount each month, but you’ll have longer to pay off the debt: up to 25 years, depending on how much you owe. To qualify, you must have more than $30,000 in federal student loan debt. It’s a good idea if you have a hefty loan, but consider the extra interest you’ll accrue.
  • Graduated repayment. Most recent college grads start out with a small paycheck that increases over time. The graduated repayment plan mirrors that expected salary life cycle. You’ll start off making small payments in the first few years after graduation, then work up to larger monthly payments. While initially you’ll be required to pay the interest only or half the payment you’d make under the standard repayment plan — whichever is greater — eventually you’ll pay substantially more. The plan does come with a few protections. Under this plan, your payments will never increase to more than three times the payment amount you started with.
  • Income-contingent/income-based repayment. Each year, you can have your monthly payments adjusted to an affordable level based on how much you’re earning. As your payments increase or decrease along with your income, you’ll have greater flexibility to chip away at your debt without stressing your family finances. In both plans, if you make consecutive payments for 25 years, the federal government will forgive any remaining debt you still have.

Switching plans

Although you select a payment plan when you first begin repaying the loan, with federal loans you can always switch plans if your financial situation changes. Not all plans are available for all loans, and some loans carry limits on the number of times you can switch repayment plans each year. Private loans offer their own set of repayment options and frequently don’t include income-based plans. Check with your lender for specifics on what’s available to you.

Other ways to ease the burden

Tacked onto your student loan are origination and administrative fees. You may be able to reduce your fees on private loans by negotiating with a customer service representative at the loan-holding institution. Other lenders will shave a point off your current interest rate if you agree to make your loan payment online or allow the payment to be automatically deducted from your checking account each month. You can get time off for good behavior, scoring a reduced interest rate for making a certain number of consecutive monthly payments on time. Unfortunately, the only borrower benefit federal loans offer is a 0.25 percent reduction in your interest rate for paying by electronic debit. Contact your lender about money-saving options.

Learn More About Home Sweet Homeowner Tax Breaks

With the housing market improving in some regions of the country, many people are becoming new homeowners.

If you’re among the new property owners, congratulations. You’ve just taken another step up the American-dream ladder and are a homeowner. Along with the joy of painting, plumbing and yardwork, you now have some new tax considerations.

The good news is you can deduct many home-related expenses. These tax breaks are available for any abode — mobile home, single-family residence, town house, condominium or cooperative apartment.

And most homeowners enjoy tax breaks even when they sell their residence.

The bad news is, to take full tax advantage of your home, your taxes will likely get more complicated. In most cases, homeowners itemize. That means you’re not living on “EZ” street anymore; you’ve moved to Form 1040 and Schedule A, where you’ll have to detail your tax-deductible expenses.

For many homeowners, the effort of itemizing is well worth it at tax time. Some, however, might find that claiming the standard deduction remains their best move.

 

If you do find that itemizing is best for your tax situation, here’s a look at homeowner expenses you can deduct on Schedule A, ones you can’t and some tips to get the most tax advantages out of your new property-owning status.

Mortgage interest

Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. And all that interest is deductible, unless your loan is more than $1 million. If you’re the proud owner of a multimillion-dollar mortgaged mansion, the IRS will limit your deductible interest.

Interest tax breaks don’t end with your home’s first mortgage. Did you pull out extra cash through refinancing? Or did you decide instead to get a home equity loan or line of credit? Generally, equity debts of $100,000 or less are fully deductible.

What if you’re the proud owner of multiple properties? Mortgage interest on a second home also is fully deductible. In fact, your additional property doesn’t have to strictly be a house. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities. You can even rent out your second property for part of the year and still take full advantage of the mortgage interest tax deduction as long as you also spend some time there.

But be careful. If you don’t vacation at least 14 days at your second property, or more than 10% of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and ax your interest deduction.

Points

Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The only issue is exactly when you get to claim them.

The IRS lets you deduct points in the year you paid them if, among other things, the loan is to purchase or build your main home, payment of points is an established business practice in your area and the points were within the usual range. Make sure your loan meets all the qualification requirements so that you can deduct points all at once.

A homeowner who pays points on a refinanced loan is also eligible for this tax break, but in most cases the points must be deducted over the life of the loan. So if you paid $2,000 in points to refinance your mortgage for 30 years, you can deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year on the new loan.

The same rule applies to home equity loans or lines of credit. When the loan money is used for work on the house securing the loan, the points are deductible in the year the loan is taken out. But if you use the extra cash for something else, such as buying a car, the point deductions must be parceled out over the equity loan’s term.

And points paid on a loan secured by a second home or vacation residence, regardless of how the cash is used, must be amortized over the life of the loan.

 

Some Overlooked Tax Breaks

It’s a tax tug-of-war. The IRS wants to make sure you pay your share of taxes. And of course, you want to keep as much of your money as you can. To succeed, be sure to take every tax deduction, credit or income adjustment to which you’re entitled to prevent overpaying your share.

Here are 10 tax breaks — some for itemizers only, others that any filer can claim — that often get overlooked but could save you some tax dollars.

1. Additional charitable gifts

Everyone remembers to count the monetary gifts they make to their favorite charities. But expenses incurred while doing charitable work often aren’t counted on tax returns.

You can’t deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible as an itemized charitable donation. Similarly, if you wear a uniform in doing your good deeds — for example, as a hospital volunteer or youth group leader — the costs of that apparel and any cleaning bills also can be counted as charitable donations.

So can the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking the Boy Scouts or Girl Scouts troop on an outing. The IRS will let you deduct that travel at 14 cents per mile.

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2. Moving expenses

Most taxpayers know they can write off many moving expenses when they relocate to take another job. But what about your first job? Yes, the IRS allows this write-off then, too. A recent college graduate who gets a first job at a distance from where he or she has been living is eligible for this tax break. This tax break is found in the adjustments to income section at the bottom of Form 1040.

3. Job-hunting costs

While college students can’t deduct the costs of hunting for that new job across the country, already-employed workers can. Costs associated with looking for a new job in your present occupation, including fees for résumé preparation and employment of outplacement agencies, are deductible as long as you itemize. The one downside here is that these costs, along with other miscellaneous itemized expenses, must exceed 2 percent of your adjusted gross income (or AGI) before they produce any tax savings. But the phone calls, employment agency fees and other costs might be enough to get you over that income threshold.

4. Military reservists’ travel expenses

Members of the military reserve forces and National Guard who travel more than 100 miles and stay overnight for the training exercises can deduct related expenses. This includes the cost of lodging and half the cost of meals. If you drive to the training, be sure to track your miles. You can deduct them on your 2016 return at 54 cents per mile, along with any parking or toll fees for driving your own car. You get this deduction whether or not you itemize; it’s one of the above-the-line deductions found directly on Form 1040. But you will have to fill out Form 2106.

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5. Child care credit, and more

Millions of parents claim the child and dependent care credit each year to help cover the costs of after-school day care while mom and dad work. But some parents overlook claiming the tax credit for child care costs during the summer. This tax break also applies to summer day camp costs. The key here is that the camp is a day-only getaway that supervises the child while the parents work. You can’t claim overnight camp costs.

Remember, too, the dual nature of the credit’s name: child and dependent. If you have an adult dependent who needs care so that you can work, those expenses can be claimed under this tax credit.

6. Mortgage refinance points

When you buy a house, you get to deduct the points paid on the loan on your tax return for that year of purchase. But if you refinance your home loan, you might be able to deduct those points, too, as long as you use refinanced mortgage proceeds to improve your principal residence.

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7. Many medical costs

Taxpayers who itemize deductions know how difficult it often is to reach the AGI threshold required before you can claim any itemized medical expenses on Schedule A. It might be easier to clear that earnings hurdle if you look at miscellaneous medical costs. Some of these include travel expenses to and from medical treatments, insurance premiums you pay for from already-taxed income and even alcohol- or drug-abuse treatments.

Keep good records of all your medical-related expenses. They could help you clear this tax deduction hurdle. Changes made with the enactment of the Affordable Care Act mean that taxpayers age 65 or younger must have qualifying medical expenses in excess of 10 percent of AGI in order to deduct them.

And self-employed taxpayers take note. If you are not covered by any other employer-paid plan, for example, one carried by a spouse, you can deduct 100 percent of health insurance premiums as an adjustment to income in the section at the bottom of Page 1 of Form 1040.

8. Retirement tax savings

The retirement savings contribution credit was created to give moderate- and low-income taxpayers an incentive to save. When you contribute to a retirement account, either an individual retirement account (traditional or Roth) or a workplace plan, you can get a tax savings for up to 50 percent of the first $2,000 you put into such accounts. This means you get a $1,000 tax credit, which is a tax break that directly reduces dollar for dollar any tax you owe.

9. Educational expenses

The Internal Revenue Code offers many tax-saving options for individuals who want to further their education. The tuition and fees deduction can help you take up to $4,000 off your taxable income and is available without having to itemize.

The lifetime learning credit could provide some students (or their parents) up to a $2,000 credit.

Don’t forget the American opportunity tax credit, which offers a dollar-for-dollar tax break of up to $2,500. This education tax break was created as part of the 2009 stimulus package as a short-term replacement for the Hope tax credit, and was made permanent in December 2015 with passage of the Protecting Americans from Tax Hikes, or PATH, Act of 2015.

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10. Energy-efficient home improvements

Tax breaks for some relatively easy energy-efficient home improvements are available under the Nonbusiness Energy Property Credit. If you haven’t claimed this credit in its prior tax year incarnations (it was first available in 2005) and have made energy upgrades in 2016, it could be worth up to $500 in tax savings.

To claim this credit, found on part two of Form 5695, you must pay attention to specific spending limits, such as $150 for high-efficiency furnaces and boilers, and $200 for replacement windows.

Yes, this tax break does require record keeping and filling out some worksheets. But if you qualify, it is a tax credit, giving you a dollar-for-dollar reduction of your tax bill. And when it comes to taxes, every dollar saved helps