Student Loan Forgiveness Programs That Discharge or Reduce Debt

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If you’re living under the crushing burden of student loan debt, it’s natural to wonder how to get rid of it. I know I am. Who wouldn’t want to wake up one morning, log into their account, and see a balance of zero?

I don’t think I’m understating it to say it would change my life, and I’m sure many borrowers would say the same. 

While mass student loan cancellation from the federal government could still be a reality, it also may amount to nothing but wishing and hoping. Fortunately, plenty of programs already exist to help you eliminate your student loans.  

Federal Student Loan Forgiveness Programs

If you’re overwhelmed by student loan debt, forgiveness programs can help ease some of the burden. Forgiveness partially or fully cancels education debt. Forgiveness programs are only available on direct federal student loans. You may have to consolidate other types of federal loans for them to qualify. And private loans don’t qualify at all.

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Forgiveness won’t erase your debt overnight, as many student loan repayment programs take 10, 20, or 25 years before you can get any remaining balance forgiven. But they can reduce your monthly payments in the meantime. There are two types.

Standard Federal Student Loan Forgiveness

Standard forgiveness is available to all borrowers of federal direct loans, including federal direct consolidation loans. It requires you to be on an income-driven repayment plan.

There are four income-driven repayment plans. Each bases your monthly payments on a percentage of your income and your family size. Depending on the plan and whether you have undergraduate or graduate loans, you could qualify for loan forgiveness in 20 to 25 years.

However, be aware you may owe income tax on the forgiven amount. The American Rescue Plan, passed in March 2021, makes all student loan forgiveness tax-free through 2025. And in March 2022, President Biden included a provision in his budget plan to make this policy permanent. But it still has to pass both the House and Senate to become law, so it isn’t a guarantee beyond 2025 yet. 

The best way to know how much of your student loan balance could remain for forgiveness at the end of your repayment term is to use the loan simulator at However, know that your payments and balance could fluctuate if you earn more or less throughout your career.

The Biden administration is also currently working to reform the income-driven repayment plan program. Current changes include recalculating borrowers’ forgiveness timelines to include certain past periods of deferment and forbearance, regardless of loan type or payment plan. 

These future changes could include streamlining income-based repayment so that all enrolled borrowers are paying only 5% of their discretionary income in monthly student loan payments instead of the 10% to 20% they’re paying now.

These changes may not seem like much, but they could be huge for some borrowers. For example, I had to forbear my loans for six years in an attempt to pay off the private loans I took out before grad PLUS loans existed and still afford things like rent, child care, and groceries on my meager teaching salary. 

This change alone puts me six years closer to forgiveness and could save me over $50,000. And the government estimates more than 3.6 million borrowers will get at least three years shaved off their clocks.  

See other changes they’re planning at 

Public Service Loan Forgiveness

Perhaps the best known federal student loan forgiveness program, the Public Service Loan Forgiveness Program is for borrowers working in public service jobs. To qualify, you must:

  • Have federal direct loans
  • Work full-time for a nonprofit or government agency for 10 years
  • Make 120 qualifying payments on an income-driven repayment plan (while working for the nonprofit)

Unlike forgiveness through an income-driven repayment plan, forgiveness through public service loan forgiveness has always been tax-free. So borrowers don’t have to worry about getting hit with a huge tax bill on any forgiven balance.

Additionally, the Public Service Loan Forgiveness Program was the first to announce major changes to the payment counts. As a result of years of mismanagement, a temporary waiver allows past “payments” to count toward the required 120 total. That includes any nonpayments made during deferment or forbearance and even late, missed, or partial payments — pretty much anything as long as you weren’t in default on your loans. 

The only requirement is that you must have been working full time for a qualifying employer (a nonprofit or government agency) during the period for which you want the payment or nonpayment counted. And you must apply for the temporary waiver by Oct. 31, 2022.  

Loan Repayment Assistance Programs

Federal forgiveness is only one option you can leverage to get rid of student debt. Some government and nongovernment organizations offer loan repayment assistance programs.

While they can’t directly forgive your debt (only the loan-holder can do that), they can contribute money on your behalf, which acts as a sort of forgiveness, usually in exchange for your professional contributions to a company or society. Plus, you can use them to pay off any type of loan, including private loans. 

Generally, you have to work for a certain company or in a certain public service field, such as medicine or the military, for a set amount of time. In exchange, they contribute money toward paying off your loans.

The amounts they contribute vary, but they can be anywhere from several thousand to tens of thousands of dollars per year, depending on the program.

If federal forgiveness programs seem unlikely to benefit you, check into these options instead. 

Profession-Specific Loan Forgiveness

Though these exist primarily in public service professions, many career fields qualify for job-specific loan forgiveness programs over and beyond public service loan forgiveness.  

For example, there are organizations that repay student loans for health care professionals in exchange for working in shortage areas, such as for doctors working in rural locations or pharmaceutical scientists performing research in highly needed crisis subjects like opioid addiction. 

Professions with forgiveness programs include:

  • Doctors
  • Teachers
  • Nurses
  • Lawyers
  • Pharmacists
  • Dentists
  • Physicians Assistants
  • Physical Therapists
  • Law Enforcement Officers
  • Psychologists
  • Veterinarians
  • Automotive Workers   

Employer-Sponsored Programs

Even if you don’t work in one of these professions, many employers offer student loan repayment assistance as a job perk. Through 2025, they can offer up to $5,250 per year as a tax-free benefit thanks to COVID-19 pandemic relief measures. So it’s worth checking with your human resources office to see if your company offers this assistance. 

If your current company doesn’t offer this benefit, crunch the numbers to see if it’s worth changing jobs. If the benefit is high enough, it could even offset a salary decrease or the extra cost of driving further to work. 

Do an online search to find companies that repay student loans. Examples include Google, Ally Bank, and Fidelity Investments.  

But don’t give up if you can’t find this benefit info on a prospective employers’ webpage. Student loan repayment is a top sought-after perk. Thus, more and more employers are beginning to offer it. It never hurts to ask during a job interview if it’s an option. 

State-Sponsored Programs

Although most borrowers think of federal programs when they think about student loan forgiveness, all U.S. states and the District of Columbia have at least one forgiveness assistance program. State forgiveness programs typically take the form of loan repayment assistance programs, which states design to attract high-need professionals to shortage areas. 

Thus, they’re always for specific professions and typically require a work commitment for a specified period.

For example, the Massachusetts Loan Repayment Program for Health Professionals awards up to $50,000 ($25,000 per year for two years) to health professionals working in shortage areas. And the Rural Iowa Veterinarian Loan Repayment Program awards up to $60,000 ($15,000 per year for four years) to veterinarians who work in rural Iowa communities.

To discover what programs are available in your state, do an online search or contact your state’s department of higher education.

Military Programs

Every branch of the military offers various forms of student loan forgiveness, including programs for doctors, dentists, psychologists, veterinarians, and lawyers as well as both current members of the armed forces and veterans.

However, not all branches offer the same benefits or programs, and in some cases, benefits only apply to service members in certain fields. Examples include:

  • Army College Loan Repayment Program. The Army’s College Loan Repayment Program pays one-third of your loans every year up to $65,000 in exchange for a three-year commitment. There are also repayment benefits of up to $50,000 for those who join the Army Reserves or Army National Guard.
  • JAG Corps. JAG stands for “judge advocate general.” It’s essentially the military’s law firm. Law school graduates who join a JAG Corps in a participating branch, such as the Army or Air Force, can get up to $65,000 of their student loans repaid in exchange for a three-year commitment.
  • Health Professions Loan Repayment Program. The Navy repays up to $40,000 per year (minus 25% for income taxes) toward student loans for qualifying medical professionals through the Health Professions Loan Repayment Program in exchange for an agreed-upon commitment. And the Air Force repays $40,000 per year (minus 25% for income taxes) for a maximum of two years in exchange for a two-year commitment. 
  • Sign-On and Retention Bonuses. Professionals are often eligible for sign-on and retention bonuses they can use to repay student loans. For example, the Army Medical Department offers a $50,000 sign-on bonus, and the Navy JAG Corps offers $60,000 in total retention bonuses payable at the four-year, seven-year, and 10-year marks.   

Other programs may be available, and offerings may change without notice, so contact a recruiter for the branches you’re considering for more information. 

Other Types of Student Loan Relief

If you’re wondering about the difference between forgiveness, cancellation, and discharge, the answer is: not much. The only real difference is implementation. 

Forgiveness and cancellation apply when you’re no longer required to make payments because you fulfilled your program requirements. Discharge happens when your loans are eliminated because of your circumstances — for example, if you become permanently disabled and can no longer work or you win a bankruptcy or lawsuit. 

The other important difference is timing. If you qualify for one of the many cancellation or discharge programs for federal student loans, you won’t have to wait decades to see your loan balance disappear. Instead, you can be free of the burden as quickly as the Department of Education processes your case. 

Cancellation Programs

The term “cancellation” only applies to federal Perkins loans. A Perkins loan is a discontinued type of federal student loan that featured a low, fixed interest rate and was for low-income borrowers. Additionally, they were typically a school loan. Your school, and not the government, was the lender. 

Those who work in various public service fields can qualify to have some or all of their Perkins loans canceled under certain circumstances. These typically include working in shortage areas and high-need specialties, such as math or special education for a teacher.   

Perkins loan cancellation happens a little at a time. For each year of service, you get a percentage of your loan canceled. It can take up to five years to wipe out 100% of your loans.

Professions eligible for Perkins loan forgiveness include:

  • Preschool teacher
  • Employee at a child or family services agency
  • Faculty member at a tribal college or university
  • Firefighter
  • Law enforcement officer
  • Librarian with a master’s degree at a Title I school
  • Military service member
  • Nurse or medical technician
  • Provider of early intervention disability services
  • Public defender
  • Speech pathologist with a master’s degree at a Title I school
  • Volunteer with AmeriCorps VISTA or the Peace Corps

Discharge Programs

Meeting eligibility requirements for a student loan discharge is rare. But if you qualify, you can get some or all of your loans eliminated. 

There are many situations in which you could qualify for a federal student loan discharge. These include: 

  • Closed School. If your college or school closes while you’re enrolled or within 180 days of your graduation or withdrawal, you’re entitled to a discharge of your debt.
  • Total and Permanent Disability. If you become permanently disabled to the extent that you can no longer work, you’re entitled to a disability discharge.
  • Death. If you die, the government can’t collect against your estate. And if you borrowed parent PLUS loans, and your child dies, you no longer have to pay the debt.
  • Bankruptcy. This one’s tough to do, but if you can prove repaying the loans would cause undue financial hardship, you can get your student loans discharged in bankruptcy.
  • Borrower Defense to Repayment. If your school broke the law, such as lying to you to get you to enroll, you can get your loans discharged.
  • False Certification. If you had your identity stolen and someone took out the loans under your name without your knowledge or forged your signature on the documents, you’re entitled to have them discharged.
  • Unpaid Refund. If your school owed you a balance but never paid it to you or returned it to the U.S. Department of Education, you can have that amount discharged.

Final Word

If you’re searching for ways to wipe out your student debt, you may be susceptible to student loan forgiveness scams. So-called debt relief companies prey on desperate borrowers by charging high upfront fees and then failing to deliver the promised forgiveness. 

Be forewarned: Legitimate student loan forgiveness, cancellation, and discharge programs will never charge you a fee to apply. And you never have to pay to sign up for an income-driven repayment plan. 

Be skeptical of anything that sounds too good to be true. Additionally, never give out your personal information over the phone or pay fees to companies whose names you don’t recognize or programs you’ve never heard of. 

If you’re unsure if a program is legit, always ask for information in writing and contact your student loan servicer, who can tell you what programs your loans actually qualify for. 

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Sarah Graves, Ph.D. is a freelance writer specializing in personal finance, parenting, education, and creative entrepreneurship. She’s also a college instructor of English and humanities. When not busy writing or teaching her students the proper use of a semicolon, you can find her hanging out with her awesome husband and adorable son watching way too many superhero movies.


What Is the Principal Amount of a Loan?

A personal loan can be a helpful financial tool when someone needs to borrow money to pay for things like home repairs, a wedding, or medical expenses, for example. The principal amount of a loan refers to how much money is borrowed and has to be paid back, aside from interest.

Keep reading for more insight into what the principal of a loan is and how it affects repayment.

Loan Principal Meaning

What is the principal of a loan? When someone takes out a loan, they are borrowing an amount of money, which is called “principal.” The principal on a loan represents the amount of money they borrowed and agreed to pay back. The interest on the loan is what they’ll pay in exchange for borrowing that money.

Does a Personal Loan Have a Principal Amount?

Yes, personal loans do come with a principal amount. Whenever a borrower makes a personal loan payment, the loan’s principal decreases incrementally until it is fully paid off.

Recommended: What Is a Personal Loan?

Loan Principal vs Loan Interest

The loan principal is different from interest. The principal represents the amount of money that was borrowed and must be paid back. The lender will charge interest in exchange for lending the borrower money. Payments made by the borrower are applied to both the principal and interest.

Along with the interest rate, a lender may also disclose the annual percentage rate (APR) charged on the loan, which includes any fees the lender might charge, such as an origination fee, and the interest. As the borrower makes more payments and makes progress paying off their loan principal amount, less of their payments will go towards interest and more will apply to the principal balance. This principal is referred to as amortization.

Recommended: What Is the Average Interest Rate on a Personal Loan?

Loan Principal and Taxes

Personal loans aren’t considered to be a form of income so the amount borrowed is not subject to taxes like investment earnings or wages are. The borrower won’t be required to report a personal loan on their income tax return, no matter who lent the money to them (bank, credit card, peer-to-peer lender, etc.).

Recommended: What Are the Common Uses for Personal Loans?

Loan Principal Repayment Penalties

As tempting as it can be to pay off a loan as quickly as possible to save money on interest payments, some lenders charge borrowers a prepayment penalty if they pay their personal loan off early. Not all charge a prepayment penalty. When shopping for a personal loan, it’s important to inquire about extra fees like this to have a true idea of what borrowing that money may cost.

The borrower’s personal loan agreement will state if they will need to pay a prepayment penalty for paying off their loan early. If a borrower finds that they are subject to a prepayment penalty, it can help to calculate if paying that fee would cost less than continuing to pay interest for the personal loan’s originally planned term.

How Can You Pay Down the Loan Principal Faster?

It’s understandable why some borrowers may want to pay down their loan principal faster than originally planned as it can save the borrower money on interest and lighten their monthly budget. Here are a few ways borrowers can pay down their loan principal faster.

Interest Payments

When a borrower pays down the principal on a loan, they reduce how much interest they need to pay. That means that each month as they make a new payment they reduce their principal and the interest they’ll owe in the future. As previously noted, paying down the principal faster can help the borrower pay less interest. Personal loan lenders allow borrowers to make extra payments or to make a larger monthly payment than planned. When doing this, it’s important that borrowers confirm that their extra payments are going towards the principal balance and not the interest. That way, their extra payments work towards paying down the principal and lowering the amount of interest they owe.

Shorten Loan Term

Refinancing a loan and choosing a shorter loan time can also make it easier to pay down a personal loan faster. Not to mention, if the borrower has a better credit score than when they applied for the original personal loan, they may be able to qualify for a lower interest rate which can make it easier to pay down their debt faster. Having a shorter loan term typically increases the monthly payment amount but can result in paying less interest over the life of the loan and paying off the debt faster.

Cheaper Payments

Refinancing to a new loan with a lower interest rate may reduce monthly loan payments, depending on the term of the new loan. With lower monthly scheduled payments, they may opt to pay extra toward the principal and possibly pay the loan in full before the end of the term.

Other Important Information on the Personal Loan Agreement

A personal loan agreement includes a lot of helpful information about the loan, such as the principal amount and how long the borrower has to pay their debt. The more information the borrower has about the loan, the more strategically they can plan to pay it off. Here’s a closer look at the information typically included in a personal loan agreement.

Loan Amount

An important thing to note on a personal loan agreement is the total amount the borrower is responsible for repaying.

Loan Maturity Date

A personal loan’s maturity date is the day the final loan payment is due.

Loan Interest Rates

The loan’s interest rate and APR should be listed on the personal loan agreement.

Monthly Loan Payments

The monthly loan payment amount will be listed on the personal loan agreement. Knowing how much they need to pay each month can make it easier for the borrower to budget accordingly.

The Takeaway

Understanding how a personal loan works can make it easier to pay one-off. To recap — What is the principal amount of a loan? The principal on a loan is the amount the consumer borrowed and needs to pay back.

Consumers looking for a personal loan may want to consider a SoFi Personal Loan. With competitive interest rates and a wide range of loan amounts available to qualified borrowers, there may be a personal loan option that works for your financial needs.

Learn more about SoFi Personal Loans today


What is the principal balance of a loan?

The principal balance of a loan is the amount originally borrowed that the borrower agrees to pay back.

Does the principal of the loan change?

The original loan principal does not change. The principal amount included in each monthly payment will change as the amortization period progresses. On an amortized loan, less principal than interest is paid in each monthly payment at the beginning of the loan and incrementally increases over the life of the loan.

How does loan principal work?

The loan principal represents the amount borrowed. Usually, this is done in monthly payments until the loan principal is fully repaid.

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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2 Strategies to Reduce Taxes from the Sale of Your Business

Recently, one of my colleagues took me aside and asked what I could do to help a 40-year-old client who sold his business last year for $40 million. He wanted to shelter the proceeds from capital gains taxes and possibly fund a trust for his family. We both already knew that the opportunity to reduce the tax recognition on the capital gain had long passed.

Had he sought our advice long before he was committed to the sale of this business, we could have explored some valuable options. Here are two of them.

The Qualified Small Business Stock Exclusion

One option our client may have considered is to investigate qualifying his business for Small Business Stock treatment under Section 1202 of the Internal Revenue Code (IRC). Section 1202 was added through the 1993 Revenue Reconciliation Act to encourage small business investment. A Qualified Small Business (QSB) is any active domestic C corporation engaged in certain business activities whose assets have a fair market value of not more than $50 million on or immediately after the original issuance of stock, regardless of any subsequent appreciation (IRC § 1202 (d)(1)).

Qualified Small Business Stock that is issued after Aug. 10, 1993, and held for at least five years before it is sold may be partially or wholly exempt from federal capital gains taxes on the value of the shares sold, up to the greater of $10 million in eligible gain or 10 times the aggregate cost basis in the shares sold in each tax year (IRC § 1202 (b)(1)). Be aware that this limitation applies to each separate shareholder, and a trust, or multiple trusts, established and funded with QSB Stock gifted by a qualified QSB shareholder may enable much more than $10 million in gain exclusion. For QSB shares acquired after Sept. 27, 2010, the capital gain exclusion percentage is 100%, and it is excluded from alternative minimum taxes and the net investment income tax with the same five-year holding requirement (IRC § 1202 (a)(4)).

But only certain types of companies fall under the category of a QSB. To be a QSB, the domestic corporation must engage in a “Qualified Trade or Business” (QTB). Such a business will generally manufacture or sell products, as opposed to providing services and expertise. Businesses that generally will not qualify are those offering services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking and insurance, as well as hospitality businesses such as hotels and restaurants (IRC § 1202 (e)(3)).

To qualify and continue as a QSB, the business must follow certain rules (there are many, and these are the most basic): It must be a domestic C corporation when the stock is issued and when sold, and at least 80% of its assets must be used in the active conduct of one or more QTBs during substantially the entire five-year holding period. If the business is already an LLC or S corporation, it may still qualify if the business reorganizes and revokes the subchapter S election and issues new stock in the C corporation, then meets the holding period before selling.

It is critical that management of the company understands all of IRC Section 1202’s requirements and agrees to maintain the business in a manner that continues to satisfy the active business requirement and the asset investment limitations, and avoid the pitfalls related to stock redemptions, tax elections and conversions.

To summarize, in order for the QSB shareholder to claim the tax benefits upon sale, the following must apply: The shareholder may be a person or business not organized as a C-Corp; the QSB stock must be original issue and not purchased in trade for other stock; the shareholder must hold the QSB stock for at least five years; and the QSB issuing the stock must devote more than 80% of its assets toward the operation or one or more QTBs.

The Tennessee Income Tax Non-Grantor Trust Strategy

Most states conform to the QSB stock exclusion and also exclude capital gains tax on QSB stock when sold as required in IRC § 1202. The exceptions are California, Mississippi, Alabama, Pennsylvania, New Jersey, Puerto Rico, Hawaii and Massachusetts. If you live in one of those states, you may want to consider a concurrent trust strategy described below to eliminate all capital gains taxes on the sale of QSB stock. But even in conforming states, the QSB shareholder can claim additional exclusions greater than the $10 million exclusion limitation by gifting into multiple trusts so all the possible gain from the sale is excluded.

Shareholders living in a nonconforming state or expecting an aggregate capital gain much greater than the $10 million cap may use a Tennessee Income Non-Grantor Trust (TING) to eliminate all federal and state taxation on the sale of the QSB stock gifted to the TING prior to an agreement to sell. Tennessee law enables a person who owns a highly appreciated asset, like QSB stock, to reduce or eliminate his resident state capital gains taxes on the sale of the QSB stock through a TING. While several other states also have laws that support this strategy, Tennessee legislators have adopted the best parts of other states’ laws. To be clear, a taxpayer already living in a state with no state income tax may use resident state trusts to spread the capital gain resulting from the sale of QSB Stock.

The grantor will gift the QSB stock to one or more TINGs (a gift of QSB stock is an exception to the original issue rule under IRC § 1202 (h)(2) and the five-year holding period is not interrupted by a gift to a trust under IRC § 1202 (h)(1)). The trustee may then sell the QSB stock in a manner that allows treatment as a long-term capital gain. If the TING makes no distributions in the tax year in which the QSB stock meeting all the requirements is sold, the sale will be excluded from federal and state capital gain recognition.

The Sourced Income Rule Affecting Trust Taxation

The client’s resident state may seek to tax at least some of the income of a nonresident TING if the client’s resident state has a close interest in the trust’s assets, such as through real property located in or a business operating in that state. This is known as the Sourced Income Rule. Some states think they have a sufficient connection to levy a tax on a nonresident trust simply because the settlor or a beneficiary of the trust lives in that state, or the trustee has an office in that state. That broad application of the definition of a resident trust may be misplaced, but many of our clients want to avoid any expense from litigating against a state taxing authority.

However, if the tax savings are substantial, then a client considering a TING should be aware that the Supreme Court has unanimously ruled that the state of North Carolina overstepped its taxing authority when it sought to tax trust income based solely on the residence of a trust beneficiary. North Carolina argued that its taxing authority included any trust income that “is for the benefit of” a state resident. The Supreme Court disagreed and ruled in the case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust “that the presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” This ruling may serve to restrain other state taxing authorities from applying an overly broad application of their resident trust rule.

Both of these strategies used together can be highly beneficial for a QSB shareholder living in a QSB nonconforming state or one who expects the total capital gain from a sale to exceed the $10 million cap on a QSB capital gain exclusion. However, these strategies also require that the QSB management and the QSB shareholder plan many years ahead of any contemplated sale.

Senior Vice President, Argent Trust Company

Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.


New Mexico Wildfire and Wind Victims Get More Time to Pay Taxes

The IRS has granted victims of the recent New Mexico wildfires and straight-line winds more time to file various individual and business tax returns and make tax payments. Specifically, victims of the fires and winds that began on April 5, 2022, have until August 31, 2022, to file and pay tax returns and payments due between April 5 and August 30.

The tax relief is available to anyone in any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. At this point, only affected taxpayers who live or have a business in Colfax, Lincoln, Mora, San Miguel and Valencia Counties qualify for the extensions, but the IRS will offer the same relief to any taxpayers in other New Mexico localities designated by FEMA later.

The IRS will also work with other people who live outside the disaster area but whose tax records are in the disaster area. Call the IRS at 866-562-5227 if you face this situation. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Deadlines Extended

The deadlines that are pushed back include the April 18, 2022, due date for filing a 2021 personal income tax return and paying 2021 taxes. In addition, wildfire and wind victims in the designated area have until August 31 to make 2021 IRA contributions. They also get more time to make the estimated tax payments due on April 18 and June 15, 2022.

The due date for quarterly payroll and excise tax returns normally due on May 2 and August 1, 2022, are extended to August 31 for New Mexico wildfire and wind victims, too. Penalties on payroll and excise tax deposits due from April 5 to August 30 will also be waived as long as the deposits are made by August 31, 2022.

Taxpayers don’t need to contact the IRS to get this relief. However, if an affected person receives a late filing or late payment penalty notice from the IRS, he or she should call the number on the notice to have the penalty abated.

Deduction for Damaged or Lost Property

Victims of the New Mexico wildfires and straight-line winds may be able to claim a tax deduction for unreimbursed damaged or lost property. To do so, they typically must itemize and file Schedule A with their tax return. However, victims who claim the standard deduction may still be able to deduct their losses if they can claim them as business losses on Schedule C.

The deduction can be claimed on the tax return for the year the damage or loss of property occurred or for the previous year. So, for any destruction in 2022, the deduction can be claimed on either a 2021 tax year return or a 2022 return. In either case, you must write the FEMA declaration number on the return claiming the deduction. For the recent New Mexico wildfires and straight-line winds, the number is DR-4652-NM.

If you decide to claim a deduction for 2021, you can amend your 2021 return by filing Form 1040X. For this purpose, you must file the amended return no later than six months after the due date for filing your return (without extensions) for the year in which the loss took place. So, for New Mexico wildfire or wind losses in 2022, you would need to file an amended 2021 return by October 16, 2023. Affected taxpayers claiming the disaster loss on a 2021 return should also put the Disaster Designation (“New Mexico Wildfires and Straight-Line Winds”) in bold letters at the top of the form. See IRS Publication 547 for details.


3 Investment Ideas for Retirees Right Now

Ah, retirement. Picture long, blissful walks on the beach. Or you’re watching the sunset from the balcony of your cruise ship and thinking: This is it – the way life should be. Then you casually check your smartphone to see how your investment accounts are doing and, gasp! You might not be as rich as you thought were.

Retirees are facing major headwinds right now when it comes to investing: Troubles in Ukraine, higher inflation and stock market jitters to name a few. If you are in or near retirement and wondering what you can do with your portfolio, here are three ideas I share with some of my clients:

1. Consumer defensive stocks

I want clients to be as diversified as possible. However, I may tilt their portfolio to consumer defensive stocks for retired or more conservative clients. Defensive stocks generally include utility companies like natural gas and electricity providers, healthcare providers and companies whose products we use day-to-day, like toothpaste companies or food and grocery stores.

According to the Center for Corporate Finance, a leading finance educator to financial professionals, defensive stocks tend to be less volatile than other types of stocks. Less volatility can mean less upside potential, but it can also mean less downside risk, which I find is what many retirees want – less downside (and hopefully better sleep at night).

2. Bonds for retirees – but not just any bonds

I like municipal bonds for retirees. Municipal bonds are issued by states, cities or local municipalities. There are many types of municipal bonds. General Obligation municipal bonds are backed by the taxing authority of the issuer – meaning the state or municipality uses taxes to pay the interest to bondholders. Revenue bonds are municipal bonds backed by a specific project. A toll road uses tolls as the revenue to pay bondholders.

Interest from municipal bonds is usually exempt from federal taxes (though there may be alternative minimum tax (AMT) considerations for certain types of investors). If you live in the state where the bond is issued, the interest may be exempt from state taxes as well.

I like tax-free interest for retirees for several reasons. Retirees may have other sources of taxable income, such as pensions, annuities or rental income, whose income may push them into a higher-than-expected income tax bracket. Retirees may also take money out of 401(k)s and traditional IRAs in retirement for required minimum distributions, which are taxable as ordinary income. Having some tax-free interest may prevent the retiree’s income from creeping up into the next higher tax bracket in retirement.

Findings from the 2019 Municipal Finance Conference suggest there is less risk of default with general obligation bonds than revenue bonds. This is because revenue bonds typically depend on the vitality of a project, which is more uncertain than the state or municipality’s ability to raise taxes to pay for a general obligation bond. For this reason, I may tilt a portfolio more toward general obligation municipal bonds than revenue bonds for retirees.

Municipal bonds are not without risk. There is no guarantee of principal and market value will fluctuate so that an investment, if sold before maturity, may be worth more or less than its original cost. Like any bond, municipal bond prices may be negatively impacted by rising interest rates. Also, municipal bonds may be more sensitive to downturns in the economy – investors may fear a struggling state’s economy may be unable to repay the bond.

For these reasons, I like to be as diversified as possible. I may use short-term muni bonds for more principal stability and less interest rate risk. I might also blend in intermediate-term municipal bonds for additional yield. If the portfolio is larger than $250K I prefer to buy individual municipal bonds for greater customization and tax-loss harvesting opportunities.

3. Beyond stocks and bonds

I like to sprinkle in small amounts of other investments. I call these my “satellites.” Depending on the client’s financial situation and tolerance for risk, I may add in real estate or small amounts of commodities, including coal, gold, corn and natural gas. I generally use mutual funds or exchange-traded funds for the diversification and the relatively low cost. I usually only buy small amounts, maybe 2%-5% of a portfolio, to help diversify the portfolio and provide an inflation hedge.

Inflation is a significant real enemy for retirees. Rising prices erode the purchasing power of a portfolio. One nice thing about owning real estate is the owner often can raise rents, which is a hedge against rising prices. I may buy Real Estate Investment Trusts (REITs) which pool together various properties. I may also use Private REITs, which are not traded on the public market, so they are less liquid, for more sophisticated investors. Private REITs are not suitable for everyone, as they tend to carry higher fees, don’t have published daily prices, but they often provide higher yield than publicly traded REITs.

For more on fighting inflation see my blog post Could Inflation Affect Your Retirement Plans?

Parting thoughts

Investing in retirement is different than investing while working. In retirement, an investor’s time horizon shrinks – they need the money sooner to live off and there’s no paycheck coming in to replenish the account. There is also less time for a retiree’s portfolio to recover from a stock market correction. Because of this, I find retirees fear losses more than they enjoy their gains.

Understanding these differences is important for successful investing in retirement. Using these three approaches – shifting slightly more to consumer defensive stocks, using municipal bonds to help prevent further taxable income, and adding small amounts of inflation-fighting investments like real estate and possibly commodities – in my opinion can all help smooth out the ride for retirees.

The author provides investment and financial planning advice. For more information, or to discuss your investment needs, please click here to schedule a complimentary call.

Disclaimer: Summit Financial is not responsible for hyperlinks and any external referenced information found in this article. Diversification does not ensure a profit or protect against a loss. Investors cannot directly purchase an  index. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors.  

CFP®, Summit Financial, LLC

Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC.  With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients.  Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.


How Taxes Impact Your Wealth Gap

Imagine you’re standing on the bank of a river. The bank you’re standing on represents your current financial status, and the opposite bank is the amount of wealth you need for retirement. The river itself is the difference between how much wealth you currently have and what must be accumulated to reach your retirement goals.

When we look at bridging this wealth gap, it’s important to factor in anything that could get in the way of reaching our goals. That’s why taxes are so important. You can’t have an accurate calculation without understanding how taxes impact your wealth gap. You see, taxation plays a significant role in our ability to accumulate wealth. If you went through your whole life without utilizing any of the tax breaks available to you, you would have built substantially less wealth than someone who understood the Internal Revenue Code (IRC) and took advantage of its many tax-saving benefits.

In fact, one of my colleagues often calls the Internal Revenue Code “the greatest wealth creation tool in the United States.” He’s not wrong. The IRC is a tool for wealth creation. As such, it can be the difference in whether taxes impact your wealth gap in a negative way. You see, much of the IRC is pages and pages of information on how you can legally minimize taxes. 

Let me be absolutely clear, I am not offering tax advice. Nor am I advocating for illegal or unethical means of avoiding the payment of taxes. You should always consult a professional before employing any of the strategies found within the IRC to ensure that you are compliant with the law.

By the Numbers

The top marginal income tax rate of 37% affects taxpayers with a taxable income of $539,900 or more for single filers. Likewise, it impacts married couples filing jointly, with a taxable income of $647,850 and above. But what does that mean for you? Will taxes increase? Will tax brackets expand, or decrease? The only way to truly opine the answers to these questions is to look back at historical tax brackets. 

In 1984, the lowest bracket was up to $3,400 for married couples. The highest tax bracket began at $162,400 (the 1984 values are the base upon which inflation indexing began). However, the brackets began to spread in the 1990s. In fact, the highest bracket floor in 1994 rose to $250,000 while the lowest bracket ceiling remained around $38,000. So, there began to be a “spread” between the tax rates of high-income earners and those with less income. That spread has become an albatross in the modern era.

Historical Tax Data

To better put into context how taxes impact your wealth gap, let’s look at some of these numbers through a tax rate calculator. Using this calculator, if you were making $50,000 (in today’s dollars) in 1913 you would have paid around 1% in taxes. However, that same $50,000 earnings in 1942 would have landed you in a 20% tax bracket. So, what happened? Well, that would have been about the time that the government needed to fund the war effort for WWII. Since that time, there hasn’t really been a whole lot of movement. If you’re a single filer earning $50K today, you’re going to be taxed at about 22%.

However, most of the clients I work with earn much more taxable income than $50K. So, let’s go with a more realistic figure. We will enter $500K into the calculator. Keep in mind, the effective tax rate made a considerable change between 1937 and 1942. In 1944, a person earning $500K (in today’s dollars) would be taxed at the bracket rate of 51%. That number rose to as high as 58.9% in the early 1980s.

What History Tells Us

Famed historian and co-documentarian of the PBS series Prohibition, Lynn Novick attributes the creation of the federal income tax to Prohibition in the United States. Novick states, “I had no idea how important liquor was to the federal government. It started in the Civil War with the levy on beer and whiskey to help fund the war, and it never really went away. Some 30% to 40% of the government’s income came from the tax on alcohol. So, Prohibitionists realized that the only way they’re going to have a ban was through income tax, which was a progressive cause and was really supposed to distribute wealth and to make things equitable during the robber baron era, where the wealth was being accumulated in a very small segment of the population.”

In 1913, the top tax bracket was 7% on any income over $500,000 ($11 million in today’s dollars). The lowest tax bracket was 1%. But so much has happened since then. We’ve experienced WWI, WWII, the Great Depression and so much more. Each of these events has played a major role in how we are taxed. For instance, the New Deal carried an inflation-adjusted price tag of $856.1 billion in 1933. Then from 1943 to 1982, the average tax bracket for the taxpayer earning $500,000 jumped from 14% to an average of 50% +/-.

Similarly, the Great Recession saw an economic stimulus that totaled $1.8 trillion. As a result, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 maintained the 35% tax rate through 2012. And recently, we saw the largest stimulus package in our nation’s history, with the CARES Act, which checked in at a staggering $3.6 trillion. As we have seen in the past, we could reasonably anticipate another increase in federal income taxes because of this.

Putting It All Together: How Taxes Impact Your Wealth Gap

According to the old adage, there are two certainties in this life: death and taxes. With that in mind, I wanted to get you thinking about how taxes will likely impact your wealth gap. I want you to be confident in your personal plans and direction. You know what you want out of retirement and how long you have to build the wealth that will fund it. Don’t let something like taxes throw off your calculation. 

To ensure that you’re not overpaying on taxes, you should have a CPA helping with your annual tax filings. But that’s not all. You should also be meeting with your CPA and CFP® about proactive strategies to mitigate your tax burden. The less you pay in taxes, the more you can save for retirement. Both will help you to close your retirement wealth gap sooner than later.

Chief Strategy Officer, WealthSource Partners

Justin A. Goodbread is a CERTIFIED FINANCIAL PLANNER™ practitioner and an adviser with WealthSource® Knoxville. After years of working in a large firm, he ventured out on his own in 2009, starting Heritage Investors, and eventually joining WealthSource® Partners LLC in 2022. As a serial small-business owner, Goodbread has bought and sold multiple businesses. He uses this experience, along with his continuing education, to help business owners grow and sell what is often their largest asset. 

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.


What Is IRS Tax Form 1098 (Mortgage Interest Statement)?

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Additional Resources

In an effort to help make filing taxes easier this year, we are breaking down the various IRS tax forms to help you know if you need them, and how to use them.

There’s nothing like a love letter from your mortgage lender with an IRS tax form to make you swoon with joy.

As tax forms go, the 1098 ranks among the simplest as you prepare your tax return. But there are some things you need to know about Form 1098 and how to use it in your tax return.

What Is IRS Tax Form 1098, Mortgage Interest Statement?

The IRS Form 1098 informs you how much interest you paid on your mortgage loan for the last tax year. 

Mortgage lenders send you this document in case you want to itemize your deductions on your tax return. They also send a copy to the Internal Revenue Service for their records, so don’t get any ideas about taking liberties with your interest deduction. 

Far fewer taxpayers itemize their deductions since the standard deduction jumped in the Tax Cuts and Jobs Act of 2017. That makes Form 1098 less relevant to the average American than it once was, though it does contain information you may need.

However, the form remains relevant to real estate investors, who deduct mortgage interest on Schedule E of their tax return. Mortgage interest is an expense for investment properties and comes off their taxable profit. Deducting it from your investment property profit doesn’t require you to itemize your deductions. 

Who Should File Form 1098?

Property owners don’t file Form 1098 as part of their federal tax return. They simply list the amount of mortgage interest in the appropriate place on their return: Schedule A for homeowners, Schedule E for investment property owners.

Mortgage lenders need to file Form 1098 with the IRS if the borrower paid more than $600 in a given year and send you a copy — which you can frame if you so choose. They typically send the form in February with the total mortgage interest paid in the previous year.

How to File IRS Form 1098

While you don’t need to file Form 1098 as a borrower, it helps to be able to read it. 

The most important information lies in Box 1: the amount of mortgage interest paid in the previous year. However, the form contains other useful information, including:

  • Box 2: Outstanding mortgage principal (your remaining loan balance)
  • Box 3: Mortgage origination date (your loan start date)
  • Box 4: Refund of overpaid interest (if applicable)
  • Box 5: Mortgage insurance premiums (if you paid private mortgage insurance for a conforming loan or mortgage insurance premium for a Federal Housing Administration loan, it appears here)
  • Box 6: Points paid on the purchase of the principal residence (you may be able to deduct these as well)
  • Boxes 7-11: Identifying information about your loan, such as the property address

You’ll also find identifying information about yourself, such as your name and Social Security number.

Other 1098 Forms

While the mortgage interest statement is the most common type of 1098 form, it’s not the only brat in the pack. You may also come across the following 1098 forms.

Form 1098-C, Contributions of Motor Vehicles, Boats

If you donated a vehicle — including boats or airplanes — to a charitable organization last year, you’ll receive a 1098-C from the charity. 

Charities often give these vehicles to individuals in need or sell them at below-market rates and use the profit to fund programs. Alternatively, the charity might auction the car to raise money for their cause.

Form 1098-C confirms you weren’t part of that transaction. However, if you donated a beater worth less than $600, you may not receive one of these forms. Read the instructions for Form 1098-C for more information.

Form 1098-E, Student Loan Interest Statement

You may feel like you’ll be paying off your student loans for the rest of your life, but at least you get a tax break. Maybe. 

Each year, you’ll receive a 1098-E detailing how much interest you paid to each loan servicer if it exceeded $600. You can deduct the interest from your taxable income on your 1040 without itemizing your deductions as long as you meet the income requirement.

You can deduct up to $2,500 in student loan interest for loans used to pay for qualified expenses while you were in school. However, the deduction does phase out if your modified adjusted gross income (MAGI) falls between $70,000 and $85,000 (between $140,000 and $170,000 if married filing a joint return). You cannot take a student loan interest deduction if your MAGI exceeds $85,000 or more ($170,000 or more if you file a joint return). 

If you paid less than $600 in student loan interest last year, the servicer may not send you a 1098-E, but you can still deduct this interest as long as you have a record of how much you paid. If you don’t know, ask your servicer and record it in your tax file.

As a bonus, if your parents or someone else pays student loans in your name for you, the IRS considers the money a gift, and you can still deduct the interest on your own taxes. However, if the loan is in someone else’s name, that person is entitled to take the interest deduction as long as he or she is the one paying on it.

Form 1098-T, Tuition Statement

If you or one of your dependents is currently in school, the school will send an IRS Form 1098-T at the end of the year detailing all fees you paid for qualified tuition and other related expenses. Calculate all education-related tax deductions and credits, such as the tuition and fees deduction, the lifetime learning credit, or the American opportunity tax credit.

The amounts on the form encompass all money you paid to the school, even if you paid in advance — the payment appears on the tax form for the year in which you actually paid it. 

For example, if you pay your spring semester tuition in December of the previous year, it will show up on the prior year’s 1098-T. These amounts include any money used from loans to pay for tuition and education expenses and list financial aid like college scholarships and grants separately.

Some expenses, such as college textbooks and school supplies, are not generally reported on the 1098-T, but you can still claim them for higher education tax credits or deductions so long as they’re classified as qualified expenses by the IRS.

Form 1098 FAQs

If you still have burning questions about 1098 tax forms, these answers to frequently asked questions can help clear them up.

How Do I Get a 1098 Form?

Your mortgage lender sends you a Form 1098, Mortgage Interest Statement. If you haven’t received it by late February, blow off some steam by yelling at your lender. (Just kidding. Be nice. They literally still own part of your house. But thinking about yelling at them should make you feel better.)

Form 1098-C comes from the charity you donated a vehicle to, while Form 1098-E comes from your student loan servicer. Form 1098-T comes from your college or university. 

Do I Need to File Form 1098 With My Tax Return?

No, you don’t. You need only include the information in the appropriate field on your tax return.

When in doubt, ask your accountant or tax advisor. Alternatively, you can use an online tax preparation service, which will ask you for the amount you paid and fill it into the right field for you. 

What Happens if I Don’t File a 1098 Form?

The IRS doesn’t require borrowers to file a 1098 form at all. But if you ignore them, you might miss out on valuable income tax deductions and make an involuntary donation to Uncle Sam. 

If you are a lender, charity, student loan servicer, or university, you are required by law to both send a 1098 form to the payer and file it with the IRS. Failure to do so will result in your immediate execution — no, not really, but the IRS may penalize you, audit you, or otherwise make your life unpleasant. 

Final Word

With a higher standard deduction these days, most Americans don’t have to stress over documenting and itemizing every single deduction anymore. It makes filing your tax return that much simpler.

However, homeowners who itemize their personal deductions do still want to include their mortgage interest among them. And the mortgage interest deduction offers another way for real estate investors to lower their taxes while leveraging other people’s money to build their portfolio of properties. Get tax advice from a qualified tax professional if you have any questions about these tax benefits.

Whether you deduct mortgage interest on your tax return or not, keep your 1098 forms in your tax records for at least three years after filing. You never know when Uncle Sam will pay you a nasty visit with an audit, and every deduction could help if he does. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.