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Started By
Message
How would you prepare/save for a $200k tax bill you will have 25 years from now?
Posted on 3/19/15 at 11:08 am
Posted on 3/19/15 at 11:08 am
This scenario is not unlikely for a large number of student loan borrowers. Let me explain.
Large numbers of law school students are going to graduate with over $150,000 of student loan debt. At the same time, their salary will most likely be around 40k-70k after school, with only average salary increases year over year.
These students will undoubtedly take part in one of the many income-based repayment plans available now. Which, at the amount they owe, will mean they will never even cover the interest owed with each monthly payment. Therefore, in 20-25 years these students will have the remainder of their loans "forgiven."
What many of the people do not yet realize is that this forgiven amount is considered "income" by the IRS for the year it is forgiven. If you never paid interest on the income-based repayments, then you will likely have over $200,000 forgiven and owe taxes on.
What would you do? I would rather owe the student-loan company than the IRS, but is there any realistic way to prepare for this burden? How will the IRS handle these situations?
This is a coming crisis that could have profound effects on the nation's economy.
Large numbers of law school students are going to graduate with over $150,000 of student loan debt. At the same time, their salary will most likely be around 40k-70k after school, with only average salary increases year over year.
These students will undoubtedly take part in one of the many income-based repayment plans available now. Which, at the amount they owe, will mean they will never even cover the interest owed with each monthly payment. Therefore, in 20-25 years these students will have the remainder of their loans "forgiven."
What many of the people do not yet realize is that this forgiven amount is considered "income" by the IRS for the year it is forgiven. If you never paid interest on the income-based repayments, then you will likely have over $200,000 forgiven and owe taxes on.
What would you do? I would rather owe the student-loan company than the IRS, but is there any realistic way to prepare for this burden? How will the IRS handle these situations?
This is a coming crisis that could have profound effects on the nation's economy.
3
Posted on 3/19/15 at 11:19 am to AnonymousTiger
After 25 years, 200,000 will be less than 100k (assuming 3% inflation). At a 35% tax rate, that is 33,000.
If you can't afford $33k after working for 25 years as a lawyer, your screwed anyway.
ETA: assuming 5% inflation, it is $21k.
And that is your nuclear scenario.
If you can't afford $33k after working for 25 years as a lawyer, your screwed anyway.
ETA: assuming 5% inflation, it is $21k.
And that is your nuclear scenario.
This post was edited on 3/19/15 at 11:22 am
Posted on 3/19/15 at 11:34 am to AnonymousTiger
The law of supply and demand says law school is a bad idea. We have too many lawyers. So the majority of future lawyers will not see the big payday and should therefore not take out loans for law school.
Posted on 3/19/15 at 11:35 am to TheHiddenFlask
That's how I would play it. In fact, I think the math clearly works out at a certain point to take it all the way to forgiveness, as you will end up paying less than you would have trying to pay off the loan.
Posted on 3/19/15 at 11:35 am to TheHiddenFlask
quote:
After 25 years, 200,000 will be less than 100k (assuming 3% inflation).
I don't think I follow you here. If the government forgives 200,000 in the year 2035, then it is still 200k, not 100k. Wouldn't you then be in the highest tax bracket and owe close to 40-50%?
Seems like the bill would be more like 80-100k owed that year. And if these students couldn't afford their regular monthly payments before, how will they pay this amount that is due immediately?
Posted on 3/19/15 at 11:37 am to AnonymousTiger
quote:
I don't think I follow you here. If the government forgives 200,000 in the year 2035, then it is still 200k, not 100k. Wouldn't you then be in the highest tax bracket and owe close to 40-50%?
Think of it this way. A lawyer who made 50,000 in 1900 was frickING LOADED. Same thing here. 200k will be "easier to come by" in 20 years than it is today. You know, how being 50 is the new 40.
Of course, if your loan size is outpacing inflation, that's another story.
This post was edited on 3/19/15 at 11:39 am
Posted on 3/19/15 at 11:47 am to AnonymousTiger
quote:
don't think I follow you here. If the government forgives 200,000 in the year 2035, then it is still 200k, not 100k. Wouldn't you then be in the highest tax bracket and owe close to 40-50%?
Seems like the bill would be more like 80-100k owed that year. And if these students couldn't afford their regular monthly payments before, how will they pay this amount that is due immediately?
In 25 years, 200K will be worth less than 200K is worth today. Assuming our tax system is somewhat the same in 25 years (a huge assumption), tax brackets increase from year to year. So, I think that future tax bill would be somewhat lower than what you are thinking... as the money will be in a bracket that has a higher starting point than it does today.
For example in 2014 the tax bracket for a single taxpayer of 33 percent is 186 ti 405. However, in 25 years, it might be 289 to 506. Who knows.
On the other hand, the balance of the loan might grow from 200K if you have negative amortization.
I do think though, if someone is a successful practicing attorney, their income will increase enough that under iBR, they will end up paying most, if not all, of the debt off.
Posted on 3/19/15 at 11:50 am to Teddy Ruxpin
A $200k tax bill and taxes on $200k are completely different things.
Posted on 3/19/15 at 11:50 am to Teddy Ruxpin
I think I follow now about the time value of money. I am curious to see how the higher interest amounts owed on these loans will affect their growth compared to inflation. In this case, the amount owed would be significantly higher, right?
Posted on 3/19/15 at 11:51 am to LSUFanHouston
Income based repayment will accelerate as your income increases. So unless you paid top dollar for a first-tier law degree and then worked at nothing but a nonprofit legal aid clinic for the next decade, you will be covering the interest and whittling into the principle at some point during your 120 required payments (before the loan forgiveness kicks in). Seriously, even massively underemployed nonprofit & public sector attorneys make $40-$50K a year, unless they're in private practice and absolutely terrible at it.
Posted on 3/19/15 at 11:55 am to hungryone
I was just using lawyers as an example because most people are aware of the crisis in the legal field these days. But I know tons of law school graduates that had to find non-legal jobs to get by and only make about 35k a year. On top of this, several of them have over $150,000 in loans, and none of them went to 1st tier schools. Private colleges accept less qualified students and charge more money.
But honestly, this can be almost any graduate school student in any field these days.
But honestly, this can be almost any graduate school student in any field these days.
Posted on 3/19/15 at 12:00 pm to Nawlens Gator
quote:
A $200k tax bill and taxes on $200k are completely different things.
Well, duh
Posted on 3/19/15 at 12:01 pm to Teddy Ruxpin
quote:
That's how I would play it. In fact, I think the math clearly works out at a certain point to take it all the way to forgiveness, as you will end up paying less than you would have trying to pay off the loan.
What about this strategy: Contribute maximum amount to 401k every year, thereby lowering the income amount the IRS uses to determine how much you make. Your monthly IBR payments would be lower, but you would never come close to paying the interest each month. Take this all the way to repayment and then simply pay the roughly 50k owed to the IRS.
Unethical, maybe. But I wonder how the math of that would work out? Possibly in the student's advantage.
Posted on 3/19/15 at 12:03 pm to AnonymousTiger
quote:
I was just using lawyers as an example because most people are aware of the crisis in the legal field these days. But I know tons of law school graduates that had to find non-legal jobs to get by and only make about 35k a year. On top of this, several of them have over $150,000 in loans, and none of them went to 1st tier schools. Private colleges accept less qualified students and charge more money.
Ya, this is a tough deal, but I think if you are making north of $60k or so and max out your ROTH and 401k, plus sock away some other funds you'll end up alright. As mentioned, hopefully your income increases and you are sort of "prepaying" that forgiveness by actually paying on the loan a little bit. Once forgiveness kicks in you pay 1/3(hopefully) of what is forgiven. Retirement funds will take a hit but hopefully compounding has helped you out.
There's a reason they want to cut IBR benefits to high income high debt borrowers. Its a windfall for them.
The 35k guy who doesn't go anywhere career wise is fricked, and will probably have some bankruptcy protection by then.
This post was edited on 3/19/15 at 12:04 pm
Posted on 3/19/15 at 12:06 pm to AnonymousTiger
quote:
Unethical, maybe. But I wonder how the math of that would work out? Possibly in the student's advantage.
I'd say almost without a doubt it works in the student's advantage. I wouldn't call it unethical, the other contracting party (the government) changed the contract terms. You are merely exercising your rights under the contract. Not only that, I would say if full repayment would create a situation where one emergency will put you on the street (due to no emergency assets of note), that is way more unethical to your family/society than exercising your contractual rights.
This post was edited on 3/19/15 at 12:07 pm
Posted on 3/19/15 at 12:08 pm to Teddy Ruxpin
Sound advice.
Posted on 3/19/15 at 12:32 pm to AnonymousTiger
quote:
then you will likely have over $200,000 forgiven and owe taxes on.
Well "owing taxes on" $200k is not the same as owing $200k in taxes, first of all.
So, at top marginal rates, that would only be about $64k - not something you want to get in the mail, but more manageable and I'm certain the IRS will have some convenient payment options for those folks.
They won't be alone when those bills come due - this is a fairly new program.
On a side note, the Public Service Loan Forgiveness program is only a 10-year payback and taxes on the amount forgiven is waived.
Posted on 3/19/15 at 12:38 pm to Ace Midnight
quote:
On a side note, the Public Service Loan Forgiveness program is only a 10-year payback and taxes on the amount forgiven is waived.
Good luck getting those in the legal field.
There's been a huge "flight to safety" in that regard. But I do know someone going this route as a DA. Of course, you could be a janitor for a Public Service employer and achieve loan forgiveness. I'm curious who has tried that route to that extreme. A career killer but you can sleep at night I suppose.
This post was edited on 3/19/15 at 12:40 pm
Posted on 3/19/15 at 12:49 pm to Teddy Ruxpin
quote:
Good luck getting those in the legal field.
The federal government employs scads of attorneys, brah.
This post was edited on 3/19/15 at 12:50 pm
Posted on 3/19/15 at 1:28 pm to Ace Midnight
quote:
The federal government employs scads of attorneys, brah.
Of course they do. The problem is there are about a billion applications for those jobs ever since the legal market tanked and debt loads skyrocketed.
This post was edited on 3/19/15 at 1:29 pm
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