Filing Taxes Separately May Not Lower Overall Student Loan Costs

Forbes

5 days ago

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For married couples balancing student loan payments, a common tactic may not be as effective as it once was: filing your taxes separately. Under income-driven repayment plans like Income Based Repayment (IBR), couples could file their taxes separately and only count their individual income to calculate their student loan payment, rather than their combined income.
The result was that married couples could see lower student loan payments as a result - especially in situations where one spouse earned significantly more than the spouse that has student loans.
However, changes under the One Big Beautiful Bill Act (OBBBA) might make this harder for some families. The OBBBA introduced several new tax breaks, but also put strict restrictions on them: you cannot use them if you file your taxes Married Filing Separately. This is in addition to the existing restrictions that already impacted families filing separately - making the potential increase in tax liability even worse.
The end result for student loan borrowers: the higher tax burden of filing your taxes separately may not outweigh the student loan savings. Here's what to know.
Why It Can Make Sense To File Taxes Separately
Married couples with student loan debt may want to file their taxes 'Married Filing Separately' in order to reduce their monthly student loan payments on income-driven repayment plans such as IBR, PAYE, ICR, and the upcoming Repayment Assistance Plan (RAP).
These plans base the monthly payment amount on your discretionary income or adjusted gross income (AGI) - both which come from your tax return. If you're married and file jointly, the combined AGI is used. But if you file Married Filing Separately, only your individual AGI is used.
For some couples, the difference can be substantial, especially if the spouse who has student loans earns significantly less than the other spouse.
However, Married Filing Separately isn't a perfect solution. In fact, it may not work for everyone, simply because Married Filing Separately typically increases tax liability. This means you might owe more in taxes as a result.
In turn, the student loan monthly payment savings may not offset the higher tax liability. For example, if filing separately lowers your monthly student loan payment by $100, but increases your total tax bill by $2,000 - you're actually worse off by $800 pear year.
The Tax Burden May Be Growing Under OBBBA
While Married Filing Separately has always had drawbacks and the potential for higher taxes for couples, the OBBBA may be making it worse.
According to Philip Taylor, CPA, 'The OBBBA has some advantages for individual taxpayers. However, for married individuals with income-driven student loan repayment options, it necessitates you revisit the decision to file MFJ or MFS. The new law likely has made the choice of MFS even less attractive.'
Specifically, several key benefits in the new tax bill that are blocked for married couples filing separately:
These new changes come on to of already existing benefits that Married Filing Separately taxpayers would miss out on, including the student loan interest deduction, education tax credits like the Lifetime Learning Credit, and reduced ability to contribute to an IRA.
These lost deductions and tax credits can significantly increase your tax bill, and that higher tax bill might not offset the lower student loan payment. When you're deciding on the right option, you need to look beyond your monthly student loan payment, and assess the total cost that includes the increased tax burden, and also the potential loss of being able to save for retirement.
How To Make The Right Choice
While some tax preparers will check and compare tax filing scenarios, most will only do it with tax liability in mind - they would simply look at which scenario has you paying the least to the IRS. But the IRS isn't the only thing you care about - you also care about your student loan payment! You need to come prepared with student loan payment scenarios (or offer to run them) so you can get a full picture.
This may add a step to your annual tax prep, but it could save you a lot of money.
'Borrowers should request a side-by-side comparison of both joint and separate filings. And be prepared to bring up any income-driven repayment plans you might have access to in order see what the impact is overall,' says Taylor.
If you don't know where to start, here are some questions you can ask your tax professional:
The important thing to remember is that there is no 'one-size-fits-all' options when making this decision. Each family's tax liability and student loan payment will be different. The only thing you can do is compare the options and numbers, and make the best choice for you.