By now, the majority of Americans have heard all about President Biden’s student loan forgiveness plan. However, there’s still a ton of misinformation floating around, including wrong details on who qualifies, when this forgiveness will be applied to federal student loan accounts, and if there is anything consumers can do to qualify if they didn’t quite meet the mark.
For example, the White House student loan forgiveness fact sheet clearly outlines the fact that Americans can qualify for up to to $10,000 in federal student loan forgiveness if their income is less than $125,000 (or less than $250,000 per couple). The forgiveness amount increases to up to $20,000 per borrower when they paid for school with the help of Pell Grants.
Now that the dust has settled, we know now that the income caps for the plan are based on the 2020 or 2021 tax year. If your income comes in below the thresholds in either of these years, you will likely qualify.
What people don’t know is if there is any way to legally lower their income in either year to qualify – even though we’re in 2022. I reached out to several accountants and financial advisors with knowledge in this space, and here’s what they said.
Income Is Likely Based On AGI (Adjusted Gross Income)
According to Logan Allec, a CPA who also owns Choice Tax Relief, the first detail to know is what “income” is based on. Specifically, Allec says income for this purpose will likely based on adjusted gross income (AGI).
Allec says AGI is basically the sum of all of a taxpayer’s taxable items of income (such as wages and net business income) reduced by certain expenses specifically allowed by the tax code that are reported in Part II of Schedule 1 of the Form 1040.
“Examples of these expenses are traditional IRA deductions and the student loan interest deduction,” he says. He also adds that itemized deductions, the standard deduction, and the qualified business income deduction reduce taxable income, but they do not reduce AGI.
Superseded vs. Amended Returns
From there, Allec says the only way to lower your AGI on a return already filed for 2021 is by correcting the existing return by filing a superseded return or an amended return.
According to Allec, a superseded return is a corrected return that is filed for a tax year after an originally-filed return for that year has been filed but before the due date of that return, including extensions.
On the other hand, an amended return is a corrected return that is filed with a separate form — Form 1040X — that is filed after the tax return’s due date (including extensions if the return is on extension) has passed.
If you filed an extension for your 2021 taxes and you’ve already filed your tax return, you have until October 17, 2022 — the extended due date — to file a superseded return to make changes to it, he says. After that, you’ll have to file an amended return using Form 1040X.
“If you’ve already filed your 2021 tax return, and you did not file an extension, you will have to file an amended return to make any changes,” he says.
Check Past Returns For Accidental Omissions
Financial advisor Eric Bronnenkant of Betterment says that lowering your AGI in a previous tax year can be very difficult if all items were accurately reported. However, if a deduction which reduces AGI was accidentally omitted (business expenses while being self-employed, rental expenses, certain capital losses, certain traditional IRA contributions, SEP IRA contributions, Health Savings Account (HSA) contributions), then amending the tax return as soon as possible may be warranted.
R.J. Weiss, who is the financial advisor behind The Ways to Wealth, adds that if you’re anywhere close to limits, talking to a qualified CPA about your options is a good idea.
This may be especially important right now since Biden’s student loan forgiveness plan is not tiered in any way. If you earned even a dollar over the threshold in both 2020 and 2021, for example, it may not take much to get your AGI down.
Also note that you just have to have an AGI below the reported thresholds in either 2020 or 2021, but not both.
“Hypothetically, you’d be eligible if you earned $1,000,000 in 2021 and $60,000 in 2020,” says Weiss.
If You Haven’t Filed Your 2021 Taxes Yet
Weiss adds that taxpayers who haven’t filed their 2021 taxes yet have options, too. Just like someone who has already filed and decides to file an amended or superseded return, business owners who haven’t filed yet and applied for an extension can still deduct qualified contributions to certain retirement plans for 2021, such as a SEP IRA.
If you’re married and used to filing jointly with your spouse, another option to consider is filing separate returns for 2021 if one spouse falls below the income limits, he says.
“While this will likely increase your total combined tax bill, there’s a chance the debt forgiveness benefit would outweigh the increase.”
Notes For Small Business Owners
Allec also points out that business owners who take a lot of deductions should spend time checking over their bookkeeping from the prior two years. Consider taking the time now to clean it up to make sure you’re reporting all of the legitimate business expenses you are legally allowed, he says.
You may find enough expenses to get you below the Biden student loan forgiveness AGI threshold for your filing status, but only if you take the time to look.
“Don’t forget about the home office deduction if you qualify and you didn’t originally take it on your 2021 tax return,” he says.
In the meantime, small business owners can also consider an accounting method change. This is more technical, he says, but the IRS gives taxpayers options as to how to account for various expenses.
For example, a business can:
- Use either the cash method or the accrual method to account for income and expenses
- Utilize the $2,500 “de minimis” safe harbor for tangible personal property or not utilize it
- Calculate depreciation on a property in one way or another
Allec says businesses can change the accounting method for a given item or items using Form 3115 and then take what’s called an IRC § 481(a) adjustment in the year of change.
Once again, this is something you may want to work with a qualified CPA on and not just wing it yourself.
The Bottom Line
You may be able to adjust your AGI down for 2020 or 2021 in order to qualify for student loan forgiveness, however, you may be taking on some risk if you choose to do so.
Financial advisor Chris Stuart of Shorepoint Capital Partners says that, unless you have a valid reason for the amendment, he would not recommend changing previous adjustments to make your AGI for a specific year fit within the income limits.
“Amending your return to get below the AGI limits without a valid reason and then immediately filing for debt relief could set off alarm bells at the IRS,” says Stuart.
Allec also believes you shouldn’t fudge the numbers just to qualify for loan forgiveness, even if it’s tempting to do so.
“If your AGI is just a little bit over these amounts, and you’re not sure if there is any more opportunity for you to reduce it further, consider reaching out to a tax professional who can give you a solid answer and do what they can to help you out,” he says.