Last month, the Biden administration announced its student loan forgiveness plan for qualified borrowers making less than $125,000 per year ($250,000 for married couples). While the current plan does not apply to most borrowers earning above the income threshold, there is one exception to be aware of.
Taxpayers who earn self-employment income as gig workers, small business owners, or freelancers may be able to reduce their income enough to become eligible. Pew Research Center says around 15 million Americans identify as self-employed.
Going further, this exception only applies to the record 19 million Americans who filed for an extension on their 2021 tax return. With the deadline approaching on Monday, October 17, there’s still time to get your financial house in order and potentially qualify for student loan forgiveness.
The Overarching Plan
The White House says President Biden’s forgiveness plan will benefit most of the over 43 million borrowers in the US who hold a combined $1.6 trillion in student loan debt. It eliminates up to $10,000 for qualified federal student loan borrowers and up to $20,000 in relief for Pell Grant recipients.
On top of the loan forgiveness plan, President Biden announced an extension of the repayment pause that started during the pandemic. Since March of 2020, the student loan repayment moratorium has been repeatedly extended, sparing borrowers around $200 billion in payments per the New York Fed.
If you earn self-employment income and filed for an extension on your 2021 tax return, now may be the time to act. To be eligible, your gross income needs to be below that $125,000 threshold, or $250,000 for couples.
Tax law says any business owner or person with freelance income can open and then contribute to a SEP-IRA, also known as a simplified employee pension individual retirement account. Contributions may be made for the prior tax year, up until the extended filing date, October 17. Contributions are limited to 20% of net earnings from self-employment, with the maximum contribution capped at $58,000.
There could be a silver lining here for people who already filed their 2021 return. Those individuals could opt to make a contribution to their SEP-IRA, and then file an amended return, in consideration of the student loan forgiveness threshold.
Taxpayers could also explore individual deductions for things like work vehicle mileage and use of a home office. In some cases, breaking out costs individually is more beneficial than taking standard blanket deductions.
Ultimately, the goal is to reduce gross income so as to potentially qualify. For those in this unique situation, working with a tax professional ahead of next month’s deadline could be beneficial.
Looking for more stories like this? Check out On the Money — SoFi’s one-stop-shop for news, trends, and tips!
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.