Getting married is a major milestone in a relationship, but it can also bring a new relationship with student loans. Like many other financial issues, student loans and marriage can be tough.
Whether one or both members of the couple have student loans, they must determine the best new way of filing taxes in their new marriage. For most married couples, filing taxes jointly is ideal, but that could change when they factor in student loans.
Filing Student Loans & Tax Deductions
If you or your spouse took out federal or private student loans to pay for college and you’ve paid interest on that loan, you may be eligible for a student loan interest tax deduction. For some married couples, this deduction (which is considered an “adjustment to income”) can equate to hundreds of dollars in tax savings.
Current tax codes allow student loan borrowers to deduct up to $2,500 in student loan interest, which means you can deduct every dollar paid in student loan interest up to $2,500. This particular tax deduction is based on your modified adjusted gross income (MAGI). Over time, the deduction will decrease and eventually phase out once you’ve met the MAGI limit for your filing status.
To be eligible for the student loan interest deduction, you must have paid interest on qualified loans during the tax year for which you are filing and have a MAGI less than the annual specified amount (set by the IRS). You also cannot be claimed as a dependent on another individual’s tax return.
For married borrowers, there’s another major requirement that can really affect how they choose to file taxes: married couples cannot file as married filing separately to be eligible for a student loan interest deduction.
Pros & Cons of Filing Separately in Marriage
So, if you are married and filing separately, neither you nor your spouse can take advantage of student loan interest deductions. However, that doesn’t mean that filing your student loans separately isn’t a valuable option in repayment.
Sometimes, even with the loss of the deduction for student loan interest factored in, filing separately can be more beneficial to repaying your student loans. For example, this can be particularly true when federal student loan borrowers are enrolled in the income-based repayment (IBR) plan.
The current IBR plan offered by the federal government determines a monthly payment obligation that is a percentage of the borrower’s income. When a married couple files their taxes together, the income level is increased and the allotted percentage (10% – 15%, depending on when you enrolled) increases as well. Essentially, your monthly payment for your student loan can easily increase if you file jointly.
So, should you file separately? That depends. When filing student loans separately, couples typically end up owing more in taxes which decreases their total tax return. A good way to determine how you should file is to estimate the outcome of each scenario using our student loan interest tax deduction calculator.
If your tax return is larger than the annual IBR repayments when filing separately, it may make more sense to file jointly. However, if filing student loans jointly significantly raises your IBR payment, the interest rate deduction may not be worth the increase in monthly payments.
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Filing your student loans separately as a married couple may help you lower your IBR payments, but keep in mind that this is not true of all income-driven repayment plans. For example, the PAYE plan, also offered by the federal government, automatically includes the income of both parties. So in that case, filing separately won’t change your monthly payment.
Additionally, the IBR implications are only valid for federal student loans, so private student loan payments don’t have the same connection to your tax returns.
It’s also possible that as you and your spouse make more money and that MAGI number increases, you may no longer be eligible for student loan deductions simply for that reason alone.
In sum, keep in mind that filing separately will immediately disqualify you from any interest-based deductions. Additionally, the type of student loans also plays an important role, with federal student loans and IBR plans having a larger impact on your deductions. In the end, weigh all the options and determine which plan best meets your specific needs.
Author: Dave Rathmanner
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