Are You Earning Too Much For Student Loan Forgiveness? Here’s what you need to know

If you’re one of the millions of Americans who have student loans, President Joe Biden’s forgiveness plan may be a welcome relief.

However, there are some key things to know about income limits, experts say.

Biden will waive $10,000 for most borrowers or up to $20,000 for Pell Grant recipients, limited to those earning less than $125,000 a year or $250,000 for married couples who file together or heads of families.

And financial advisers have already received a slew of questions from clients, including whether their income may be too high to qualify for debt relief.

Learn more about personal finance:
Are your student loans eligible for federal government remission? What we know
What President Biden’s student loan forgiveness means for your taxes
“He’s a game changer.” Pell Grant recipients react to student loan cancellation

“I have a lot of clients who are somewhere on the verge,” many of whom are mid-career, dual-income households, said Ethan Miller, certified financial planner and founder of student loan specializing Planning for Progress. in Washington. , DC, area.

Adjusted gross income is the “magic number”

While eligibility may be easier for borrowers well below or above the limits, it may be trickier for those nearing the $125,000 or $250,000 thresholds.

That’s because the number is based on what’s called Adjusted Gross Income, or AGI, which may be different from your gross salary.

“That’s the magic number,” Miller said, noting that the US Department of Education uses AGI for existing income-based student loan repayment plans.

You may be eligible for a rebate if your AGI was below the $125,000 or $250,000 thresholds in the 2020 or 2021 tax year.

And 2020 can be big for anyone who lost their job or earned less in the first year of the pandemic, according to CFP Tommy Lucas, an enrolled agent with Moisand Fitzgerald Tamayo in Orlando, Florida.

How to Calculate Adjusted Gross Income

You calculate AGI by adding up your income — including salary, interest and more — and subtracting items from Schedule 1 Part II of your tax return, Lucas explained.

Some of those items may include deductible Individual Retirement Account or Health Savings Account contributions, educator expenses and more, he said.

For example, eligible couples under age 50 who made deductible IRA deposits may have reduced their adjusted gross income by $12,000 for 2020 or 2021.

For most individuals, your gross income and your adjusted gross income will be quite close, if not the same.

Tommy Lucas

Financial Advisor at Moisand Fitzgerald Tamayo

“The most important thing is the deductible IRA,” Lucas said. However, the deadline for 2020 or 2021 IRA contributions has already passed.

But if you made a deductible IRA contribution for either year, you’ll want to make sure it was included on Schedule 1 of your tax return and reflected on your AGI.

If not, you might consider amending your tax return electronically, particularly if reducing your AGI by that amount “makes or breaks” eligibility for the rebate, Lucas said.

Of course, processing an amended return by the IRS can take time, so you need to act quickly, he said.

AGI may vary more for self-employed borrowers

If you’re a full-time W-2 worker with no other income or deductible IRA contributions, you’re less likely to see a difference between gross income and adjusted gross income, Lucas said.

Self-employed filers or contract workers, however, generally have more opportunities to reduce AGI, including some pension plan deposits, health insurance premiums, half self-employment tax and more. , did he declare.

“But for most individuals, your gross income and your adjusted gross income will be pretty close, if not the same,” Lucas said.

Where to find your AGI

Although calculating adjusted gross income may involve a few steps, you can also find the number on your tax return.

To confirm your AGI for 2020 and 2021, find line 11 on the first page of your tax return, known as Form 1040, Miller said.

“I think it’s pretty straightforward for most people,” he added.

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