Written By Travis Hornsby, CFA®, CFP®
Ben Nanney was a prior consultant for Student Loan Planner®.
He has experience with the tax code and is going to share some basics you should know when filing your taxes. We’ll also cover some insider tax tips and get his insight on what’s called the breadwinner loophole.
Let’s see what Ben has to say!
Ben Nanney’s background
One thing that struck me about Ben Nanney is that he has a clear passion for helping people. That’s one thing I really look for when adding someone to the team.
As a Certified Public Accountant (CPA) and Certified Financial Planner (CFP®), Nanney has an extensive background in accounting and financial planning.
After working in the accounting field for several years, Nanney transitioned into a fee-only planning practice doing CPA level work before launching his own financial planning firm in April 2019. His firm, Crossroads Financial Consulting, focuses on people who have 1099 income and locum tenens physicians trying to maximize their financial planning and investing.
He was a part of the Student Loan Planner® team from November 2019 to July 2020.
We’ve been a little weak on knowing tax rules in great detail, and Nanney knows the ins and outs of that in great detail. He’s also been instrumental in sharing knowledge about the processes student loan servicers use that rounds out our team really well.
Tax Basics from Nanney
Tax lingo is a little like speaking a different language. Two of the most commonly misunderstood terms are AGI and tax deductions. Here, Nanney goes into detail about what each of them mean.
What is AGI?
Adjusted gross income (AGI) is a tax term that refers to your total taxable income for the year. “What confuses some people is that your AGI is calculated before any itemized standard deductions are considered,” said Nanney.
For example, if your income is $200,000, and you donated $100,000 to charity, your AGI would still be $200,000 “because that itemized deduction to charity would come later.”
The easiest way to think about your AGI is to consider your total taxable income that you’re making on an annual basis. “That’s pretty close to your AGI.”
What is an above the line deduction?
An above the line deduction “comes into play before the AGI is computed,” said Nanney. It includes a student loan interest deduction, which is good news for borrowers.
Most people, according to Nanney, don’t see a significant difference in their AGI from above the line deductions.
One exception is for people who contribute a lot to retirement accounts. The amount you add to your retirement account will lower your AGI, which can lower your tax bill and your student loan payment.
SEP IRA and 401(k) contributions are also above the line deductions, and “there are six or seven more above the line deductions that are very specific and will subtract from your gross income to get to your adjusted gross income.”
“There’s definitely a benefit to contributing to retirement accounts,” said Nanney. If we go back to the example of a $200,000 income and you max out your 401(k) by contributing $19,000, your gross wages are only $181,000.
Insider tax advice
Being familiar with the nitty-gritty details of the tax code and the complex world of student loans gives Nanney a unique perspective on how to optimize your tax return.
It’s something most people don’t think about too much. But why pay more in taxes than you need to? Here’s what Nanney has to say about maximizing your tax savings.
Filing taxes separately vs joint when you’re married
Most married couples file a joint tax return. It’s a no-brainer when it comes to income taxes, right? The IRS has incentives for married couples that allow them to deduct a big chunk of their income right off the bat.
But filing separately has its benefits if you’re a student loan borrower.
In fact, there is a legal way to file your taxes separately when you’re married, and it could save a ton on your student loan debt.
“It really depends on your situation,” said Nanney. He recommends running the numbers yourself for your situation or talking to an accountant that can run them for you.
Why file taxes separately?
If you make the switch, you can lose childcare credits and student loan deductions. Filing separately also affects how you itemize vs. taking standardized deductions. “It’s not that complicated, but you are losing some deductions by filing separately.”
“It might cost you $2,000 more to file separately vs. filing jointly, but you might save $5,000 on your student loan payment. You get ahead $3,000 a year by doing that strategy, so it makes sense,” said Nanney.
He’s also seen other situations where it breaks even. The bottom line is that you want to run the numbers based on your and your spouse’s income. Then you should make a decision based on that.
If you don’t already have a good CPA, I recommend Student Loan Tax Experts for an affordable solution. They’ll give you a 10% discount if you mention that Student Loan Planner® referred you.
Community property states
Community property states treat income differently. Often, that creates a benefit when one spouse earns more than the other.
“I was in Tennessee, then Kentucky, so we weren’t a community property state, and I wasn’t exposed to community property laws that often,” said Nanney.
But working with Student Loan Planner® has shown him how living in a community property state can benefit borrowers.
When you’re married, “a community property state allows you to total the household income and divide it by two,” said Nanney. This calculation creates an advantage if one spouse makes a significantly higher amount of money than the other.
It’s called the breadwinner loophole.
The breadwinner loophole explained
“Let’s say you’ve got one spouse who’s making $100,000, and the other is making $50,000,” said Nanney. “The spouse that’s making $100,000 would only report $75,000 of taxable income in a community property state.”
This situation has effectively changed that person’s taxable income from $100,000 down to $75,000. A lower taxable income results in a lower tax bill. And for student loan borrowers on an income-driven repayment (IDR) plan, it means your monthly payment is lower, too.
“As far as I can tell, it’s completely legitimate because they’re just following state laws as far as distribution of income,” said Nanney.
This loophole also applies to federal returns “because federal returns are following the state laws for the state that the couple resides in.”
How to get a consultation with Student Loan Planner®
Nanney is passionate about making a difference in people’s lives, and we were glad to have him as part of the team. If you're interested in exploring tax loopholes and other student loan repayment strategies, reach out to one of our consultants and book a consult today!
