You have worked hard all year, and you know you have a tax return coming to help you get some much-needed work done on the house, car or another project. The only problem is that there is a tax offset looming over your head. In this article, we are going to talk to you about what to do when student loans are threatening your tax return, and you are dealing with student loans taxes and other challenges.
What Is a Tax Refund Offset?
Put simply, a tax refund offset is a reduction of your federal tax refund due to the required payment of an unpaid debt. If you have state or federal debts such as federal student loan debt or child support, the IRS could take some or all of your tax refund to pay these obligations.
Will My Tax Refund Be Offset?
If you are in default with any of your student loans, you can be sure that you will have an offset soon if you don’t already. Defaulting on student loans and being in collections is a sure way to know that you won’t have your full tax refund coming to you. The IRS will send a notice to you in the mail regarding this tax offset, but failure to receive this notification is not grounds to fight and offset. To check for offsets pending on your social call the toll-free number provided by the IRS: (800) 304 – 3107
How to Prevent a Tax Refund Offset
To prevent a tax refund offset, you need to get your loans out of default. As long as your loans are in default, you are going to continue to experience tax refund offsets and even wage garnishments. If you are feeling trapped, you should know there are options to help you get through these challenges. Here are a few of the best options:
- Consolidate into Direct Loan Program – When you do this, all of your loans will be bundled so you can make one payment each month instead of having to deal with multiple lenders. Most of the time, this consolidation is done through a new lender. Once the consolidation is complete, you are no longer in default, and you are in good standing with your loan. The payment plan will be made affordable for you. There are various programs like PAYE and IBR which allow you to make as little as $0.00 monthly payment. The size of your payment depends on the size of your family and your income.
- Rehabilitate With Your Current Lender – If your current lender is willing to help you get back on track with payment, you can work out a rehabilitation period and get your loan out of default. Once the rehab period is up, you will have to go back to making higher payments again.
- Repay In Full – If you want to get rid of tax refund offsets right away, you can pay your loans in full. Most people aren’t able to do this and often go with one of the options above.
Challenging the Tax Refund Offset
When you are thinking about your entire tax refund going to debt repayment, you might not be excited about it, but there is very little that can be done when you get hit with an offset. You should know that a tax refund offset is legal and the IRS can and will withhold according to law. If you want to fight an offset, you need to have a valid reason. Some of the valid reasons the may hold up are as follows:
- The loan has already been paid off or is no longer owed before the offset
- You are currently in rehabilitation with your lender and are making satisfactory payment to the lender
- You are currently in bankruptcy
- The debt has been discharged through bankruptcy or disability discharge
- You are totally and permanently physically challenged
- You believe it is not an enforceable debt
You should know that it is almost impossible to fight an offset and the best course of action is to clear up the problem.
What About My Spouse’s Refund?
If you are worried that your spouse’s tax refund is going to be offset as well, you are correct. Any refund that is payable to a couple is subject to a tax refund offset even if only one of the couple is responsible for the loan that needs repaying.
The spouse that is not responsible for the debt can file an “injured spouse” claim that will allow them to retrieve their portion of the offset. To qualify, they must have either paid federal income tax or claimed a credit and filed a joint return, not being responsible for the debt. Form 8379 is the form to use for filing for injured spouse.
While student loan debts can be overwhelming, the best thing to do is to start to get a handle on those debts. You do not want to have to go through an offset, and many people do not understand how severe going into default on student loans truly is. If you fear you are going to default on your student loans, make sure you start working to fix this problem as soon as possible, so you do not have to deal with garnishments or tax refund offsets. There are many programs available to help you with this problem.
If you have ever been through a tax refund offset due to student loan debt, leave a comment and share your experience in the section below.