File jointly or separately?

[agoke]

Hello, I am not working as I am on an educational leave from my job. I am attending a kind of trade school full time and my income is now zero. My wife makes about 60k. Our previous combined income last year was 125k Would it make sense for me to file separately in order to get my current student loan payments down to zero?

[xmasbaby0 · Accepted solution]

If you were legally married at the end of 2022 your filing choices are married filing jointly or married filing separately.

Married Filing Jointly is usually better, even if one spouse had little or no income. When you file a joint return, you and your spouse will get the married filing jointly standard deduction of $25,900 (+$1400 for each spouse 65 or older)  You are eligible for more credits including education credits, earned income credit, child and dependent care credit, and a larger income limit to receive the child tax credit. 

If you choose to file married filing separately, both spouses have to file the same way—either you both itemize or you both use standard deduction. Your tax rate will be higher than on a joint return. Some of the special rules for filing separately include: you cannot get earned income credit, education credits, adoption credits, or deductions for student loan interest. A higher percent of your Social Security benefits may be taxable. Your limit for SALT (state and local taxes and sales tax) will be only $5000 per spouse. In many cases you will not be able to take the child and dependent care credit. The amount you can contribute to a retirement account will be affected. If you live in a community property state, you will be required to provide additional information regarding your spouse’s income. ( Community property states:  AZ, CA, ID, LA, NV, NM, TX, WA, WI)

 If  you are using online TurboTax to prepare your returns, you will need to prepare two separate returns and pay twice.

https://ttlc.intuit.com/questions/1894449-married-filing-jointly-vs-married-filing-separately

https://ttlc.intuit.com/questions/1901162-married-filing-separately-in-community-property-states

https://ttlc.intuit.com/questions/1894449-is-it-better-for-a-married-couple-to-file-jointly-or-separ...

[NCperson · Accepted solution]

@agoke - do the math both ways:

1) file joint: what is the tax and what is the student loan payment? 

2) file separately: what is the tax and what is the student loan payment? 

 assuming no children: 

1) a Married - filing joint return with a $60,000 income yield tax of $4349

2) a Married - filing Separte return with a $60,000 income yields tax of $5466

the difference is $1117

If you are on a repay plan, the new plans that kick in this summer would be something like this: 

Filing Joint:  Federal poverty level: $19,000 * 2,25 = $42750, and the difference from $60,000 is $17250, so the payment would be limited to no higher than 5% of that or  $862 per year

Filing Separate, since you have no income, the loan payment would be zero. 

So if you file Separate, the tax is $1117 higher and the loan payments are $862 lower - not worth it.

But if the repay plan was based on10% of the discretionary income or $1724 for the year, then it would make some sense.

one of the keys is whether you have children, as some of the tax credits become a challenge. Also, if you are expecting to take a tax credit for the trade school costs, you lose that if you file Separate as there is no educational tax credit eligibility when filing Separate.  Also, the loan interest is not deductible when filing Separate. 

CHECK MY LOAN CALCULATIONS WITH YOUR STUDENT LOAN SERVICER!  as it may not be accurate

[Opus 17]

You have to test it.  Your spouse will pay more tax filing MFS than you would pay combined if you filed jointly.  Whether that is worth the payments is something you will have to figure out.  

Also, I don't know the current rules for income based repayment, but when you drop your payments for a year, if the interest keeps accruing, then you will have even more to pay off once your income goes back up.  If you do decide to file MFS and drop your payments, I would still make an effort to pay as much as you can voluntarily to reduce your debt.

[NCperson]

@Opus 17 - one of the features of the new SAVE program is that as long as you make the required payment, the unpaid interest is absolved - it is not deferred or capitalized. 

https://studentaid.gov/announcements-events/save-plan