Buzz
While marriage often brings tax advantages, opting for 'Married Filing Separate' can sometimes be a more beneficial tax strategy. If you're on an Income-Based Repayment plan for your student loans, filing separately from your spouse might be the better choice.
A reader shared a tip for managing his wife's student loan payments. After completing her doctorate, she was left with $85,000 in student debt. Unable to afford the $1,100 monthly payment, they chose an Income-Based Repayment (IBR) plan, which reduced the payments to $230 a month.
Since the plan calculates payments based on taxable income, they soon discovered that filing taxes separately would have been a more advantageous decision:
After several raises, her income was included in the most recent tax return, and her payment increased to $630/month. That $400/month hike was too difficult to manage. I researched and found out that had we filed as 'Married Filing Separate,' the IBR plan would have only considered her income, not ours combined.
If one spouse is dealing with significant student loan debt and a low income, the Income-Based Repayment (IBR) plan works best if you file taxes as 'Married Filing Separate,' as this reduces your payment obligations.
However, keep in mind a few important considerations. When using IBR, you're still required to repay your loan eventually; this plan simply extends the repayment period. The White House website clarifies:
The program reduces monthly payments for borrowers with substantial debt and limited income, but it could lengthen the repayment term, leading to more interest accrued over the life of the loan.
Also, calculate whether filing jointly or separately benefits you more in terms of IBR. GL Advisor supports our reader’s advice and recommends consulting a professional to optimize your repayment strategy.
Photo: Cory M. Grenier
