Married filing jointly v. separately and IBR Forum

[dsb83]

I'm about to enter repayment on my law school loans and am trying to figure out the income tax implications. I understand that if I file a separate income tax return, then I can count only my own income and not include my wife's in determining my IBR payment amount. If you file jointly, your spouse's income and any student loan debt is considered as well. My wife and I will be earning roughly the same amount, so there ends up being little benefit to filing jointly going forward. However, for this year, I will only have about 3 months of income, so there would be substantial benefit to filing jointly.

My question is if my wife and I file jointly for this income tax year but intend to file separately in subsequent years, will my student loan payment payments next year be based on our joint income or only my separate income? Put another way, do I have to file separately this year to only have my income considered in calculating payment?

I don't think the details matter other than there isn't much of a tax benefit for us filing jointly in a normal year and my wife has no student loan debt but PM me if you think more details regarding income and debt would be helpful.

Thanks!

[A. Nony Mouse]

Yes, if you want only your income to be considered in the coming year, you need to file separately. At least, this is how I understood it, and how it worked for me. Basically the two ways to verify income for IBR are taxes and paystubs. So if you file jointly, and you submit your tax return for verification, your income will be your joint income. You can submit a paystub to have your income based on that, but I think if your wife is working they will still want to see her income (if you filed jointly) (the only time I used a paystub for verification was when my husband wasn't working and I was showing a change in economic circumstances).

You could also try calling your servicer and asking - sometimes this is not helpful, but it might be.

I also thought that they were eliminating the "file separately = only count your income" loophole this December, but I may have that wrong.

[CanadianWolf]

Be sure to check with a tax professional before filing a joint return if you plan to file separate returns in subsequent years.

[dsb83]

Thanks for the responses. Anyone else hear they were eliminated the "loop hole" for filing separately? And I agree with the advice that talking to a tax professional is the way to go...just trying to figure out what to expect until I get around to that.

[Tiago Splitter]

Yes, if you want only your income to be considered in the coming year, you need to file separately. At least, this is how I understood it, and how it worked for me. Basically the two ways to verify income for IBR are taxes and paystubs. So if you file jointly, and you submit your tax return for verification, your income will be your joint income. You can submit a paystub to have your income based on that, but I think if your wife is working they will still want to see her income (if you filed jointly) (the only time I used a paystub for verification was when my husband wasn't working and I was showing a change in economic circumstances).

You could also try calling your servicer and asking - sometimes this is not helpful, but it might be.

I also thought that they were eliminating the "file separately = only count your income" loophole this December, but I may have that wrong.

I may be wrong as well but I think they only eliminated the loophole for people signing up for RePAYE, which only matters if you aren't eligible for PAYE but want to be. I believe if you qualify for traditional PAYE you can still choose between joint/separate and you can always stick with regular old IBR.

[A. Nony Mouse]

I think that's correct, although my impression was that once REPAYE went into effect, IBR was essentially going away (because people who were on IBR because they couldn't qualify for PAYE would jump to REPAYE). But maybe that's just my assumption that if you have the sufficient financial hardship to qualify for REPAYE there would be no incentive to stay on IBR and pay more, so definitely don't take my word on that.

[AVBucks4239]

I'm about to enter repayment on my law school loans and am trying to figure out the income tax implications. I understand that if I file a separate income tax return, then I can count only my own income and not include my wife's in determining my IBR payment amount. If you file jointly, your spouse's income and any student loan debt is considered as well. My wife and I will be earning roughly the same amount, so there ends up being little benefit to filing jointly going forward. However, for this year, I will only have about 3 months of income, so there would be substantial benefit to filing jointly.

My question is if my wife and I file jointly for this income tax year but intend to file separately in subsequent years, will my student loan payment payments next year be based on our joint income or only my separate income? Put another way, do I have to file separately this year to only have my income considered in calculating payment?

I don't think the details matter other than there isn't much of a tax benefit for us filing jointly in a normal year and my wife has no student loan debt but PM me if you think more details regarding income and debt would be helpful.

Thanks!

I'm very pro-PAYE but I think you're significantly marginalizing the consequences of filing jointly vs. separately compounded over 20/25 years. No student loan interest deduction, no married deduction, no child tax credit, no dependent care credit (if you hire a babysitter), no being able to contribute to a traditional IRA, etc.

For example, the student loan interest deduction is $2,500 per year. Multiply that by two if your wife needs it too. That's $5,000 per year for as long as you qualify (and the cap should continue to get adjusted for inflation). Say you qualify for ten years...$5,000 credit x 10 years x .25 = $12,500 in refunds. Child care dependent credit is $750 refund per year. Married credit is $2,000 per year in refunds. On and on and on...multiply them all out by the entire 20 year period and it's a ton of tax savings that you're throwing out the window.

So, back to basics. Your payment is 10% of discretionary income, discretionary income being defined as your adjusted gross income (AGI) minus 150% of the poverty line. Lucky for you, AGI is incredibly manipulative and you can drive it way down to keep your payments in check.

With that in mind, depending on your income, I think you're better off filing jointly and getting creative with reducing your AGI. Contribute a ton to 401ks (you can do $18,000 each). Contribute the max ($5,500 each) to traditional IRAs. Open HSAs and contribute the max ($6,650 per family). All that right there is more than $53,000 in savings that won't be considered before your PAYE payment. And you could go even further in driving it down (including 529 plans), but that's a bit more nuanced.

The above example is obviously a very high savings rate, of course, but the point is that you and your wife should work as a team to drive your collective AGI down so you can enjoy the tax benefits of filing jointly while also enjoying low student loan payments.

[wildhaggis]

I'm bumping this to ask a question about REPAYE's effect on the "married filing separately" situation.

My understanding is that, under current PAYE and IBR, you can file separately to avoid recognition of combined spousal income, forgoing the tax benefits of filing jointly to keep AGI (and thus monthly payments) low.

Under REPAYE, combined spousal income is recognized regardless of filing status.

So, say you and your spouse both earn $40k per year. Under current PAYE or IBR, your monthly payment is based off of your $40k AGI so long as you file separately from your spouse. This amounts to $186 per month under current PAYE and $279 per month under IBR. The same, of course, is true for your spouse's monthly payment. You would thus combine to owe $372 or $558 per month on a combined $80k per year income.

Under REPAYE, your monthly payment is based off of your $80k combined AGI, regardless of your filing status. Again, the same holds true for your spouse. This amounts to approximately $519 per month under REPAYE. You and your spouse would thus owe over $1,000 per month. Both of your payments would effectively double.

Am I missing something that would make this not fucking suck? And, yes, I understand that, at a very high savings rate, it's possible to lower your AGI back to a similar level while simultaneously benefitting from the tax benefits of filing jointly. Unfortunately, the small firm I work for does not offer a 401(k), which completely guts my ability to actually do that. So, even if I upped my savings rate to that level, it still isn't an option for lowering monthly payments under REPAYE.

Since I do not qualify for current PAYE, I do not see a scenario where REPAYE is a better financial option than IBR. It's fuck-all, as far as I'm concerned, correct?

[wildhaggis]

Bump for my above post.

Anyone have insight on this?

[Tiago Splitter]

I think your analysis is correct. But there are a fair number of people who for other reasons choose not to file separately so for them it's 10% instead of 15% which is obviously an improvement. Also under REPAYE you only get charged 50% of the unpaid interest.

[wildhaggis]

I appreciate the reply.

As follow-up to my post, will IBR still be available when REPAYE begins?

My understanding is that it would replace current PAYE for those not already on it. Not sure if it's supposed to "replace" IBR, or what.

Basically, will it still be possible to enroll in IBR when REPAYE rolls out?

[A. Nony Mouse]

I don't think you can enroll in IBR after REPAYE, although you stay on IBR if you're already on it (but I could be wrong about that, that's just my impression).

More importantly, I also think that there's somewhere in the info where you list your spouse's loans, so I don't think you end up having to pay quite twice. (But I could have that wrong too. My spouse doesn't have loans so I've never had info to add but I'm sure they ask for it.) There are calculators online so look for one of those and compare the numbers? (Assuming there are REPAYE ones already.)

[wildhaggis]

I don't think you can enroll in IBR after REPAYE, although you stay on IBR if you're already on it (but I could be wrong about that, that's just my impression).

More importantly, I also think that there's somewhere in the info where you list your spouse's loans, so I don't think you end up having to pay quite twice. (But I could have that wrong too. My spouse doesn't have loans so I've never had info to add but I'm sure they ask for it.) There are calculators online so look for one of those and compare the numbers? (Assuming there are REPAYE ones already.)

The bolded is interesting, but news to me.

Every calculator I've seen doesn't change payments to account for loan amounts. I also haven't seen any source to indicate that high spousal student loan indebtedness would offset the added burden of filing jointly. Obviously, I would still very much like that to be the case.

Can anyone provide a source?

[A. Nony Mouse]

My source is just filling out the forms, where they ask you about spousal loans. But I can't say I know exactly what they do with that info.

Edit: of course that's not REPAYE yet either, so I take it back. It's for IBR filing jointly (I'm in a community property state so can't file separately any more). So you should probably just ignore me. The best source will be your loan servicer (when you get one).

[elijah54594]

I'm about to enter repayment on my law school loans and am trying to figure out the income tax implications. I understand that if I file a separate income tax return, then I can count only my own income and not include my wife's in determining my IBR payment amount. If you file jointly, your spouse's income and any student loan debt is considered as well. My wife and I will be earning roughly the same amount, so there ends up being little benefit to filing jointly going forward. However, for this year, I will only have about 3 months of income, so there would be substantial benefit to filing jointly.

My question is if my wife and I file jointly for this income tax year but intend to file separately in subsequent years, will my student loan payment payments next year be based on our joint income or only my separate income? Put another way, do I have to file separately this year to only have my income considered in calculating payment?

I don't think the details matter other than there isn't much of a tax benefit for us filing jointly in a normal year and my wife has no student loan debt but PM me if you think more details regarding income and debt would be helpful.

Thanks!

Under PAYE and IBR programs you have to reverify every year (source, I am dealing with this right now). So you don't have to worry about that going forward if you do something this year. It sets you for the next year and then is reassessed.

[elijah54594]

I'm about to enter repayment on my law school loans and am trying to figure out the income tax implications. I understand that if I file a separate income tax return, then I can count only my own income and not include my wife's in determining my IBR payment amount. If you file jointly, your spouse's income and any student loan debt is considered as well. My wife and I will be earning roughly the same amount, so there ends up being little benefit to filing jointly going forward. However, for this year, I will only have about 3 months of income, so there would be substantial benefit to filing jointly.

My question is if my wife and I file jointly for this income tax year but intend to file separately in subsequent years, will my student loan payment payments next year be based on our joint income or only my separate income? Put another way, do I have to file separately this year to only have my income considered in calculating payment?

I don't think the details matter other than there isn't much of a tax benefit for us filing jointly in a normal year and my wife has no student loan debt but PM me if you think more details regarding income and debt would be helpful.

Thanks!

I'm very pro-PAYE but I think you're significantly marginalizing the consequences of filing jointly vs. separately compounded over 20/25 years. No student loan interest deduction, no married deduction, no child tax credit, no dependent care credit (if you hire a babysitter), no being able to contribute to a traditional IRA, etc.

For example, the student loan interest deduction is $2,500 per year. Multiply that by two if your wife needs it too. That's $5,000 per year for as long as you qualify (and the cap should continue to get adjusted for inflation). Say you qualify for ten years...$5,000 credit x 10 years x .25 = $12,500 in refunds. Child care dependent credit is $750 refund per year. Married credit is $2,000 per year in refunds. On and on and on...multiply them all out by the entire 20 year period and it's a ton of tax savings that you're throwing out the window.

So, back to basics. Your payment is 10% of discretionary income, discretionary income being defined as your adjusted gross income (AGI) minus 150% of the poverty line. Lucky for you, AGI is incredibly manipulative and you can drive it way down to keep your payments in check.

With that in mind, depending on your income, I think you're better off filing jointly and getting creative with reducing your AGI. Contribute a ton to 401ks (you can do $18,000 each). Contribute the max ($5,500 each) to traditional IRAs. Open HSAs and contribute the max ($6,650 per family). All that right there is more than $53,000 in savings that won't be considered before your PAYE payment. And you could go even further in driving it down (including 529 plans), but that's a bit more nuanced.

The above example is obviously a very high savings rate, of course, but the point is that you and your wife should work as a team to drive your collective AGI down so you can enjoy the tax benefits of filing jointly while also enjoying low student loan payments.

Also, I feel like the literature about this topic is way outdated. Since family structures are changing, and the insane loans have become a much different thing than most of the folks writing the advice, you have to know that unless you have kids and pay a lot in daycare, or you really want to have the student loan interest deduction, this is a really viable option for a lot of folks. It is not a one size fits all situation in any way. The deduction is literally half of the married combined. The thing that is different is that your tax bracket changes based on filing separate. So it really is important to look at what your income is vs. your spouse. If you make a lot less than your spouse, this makes a lot more sense to file married separate. It has been a real tool to figure it all out, but generally it is a really worthy option for those with big loans with spouses that don't have any. This contingent is growing rapidly. I just wanted to add my two cents.

Also, you don't really lose the child tax deduction generally, you just have to split it in a weird way and it is based on your individual return. So again, how much you are making vs. your spouse, and what your relative loans are, are really important factors to consider.