From married filing jointly 2015 to married filing separately 2016. I need to do it for student loan debt. Can I change back to jointly in future? Any consequences?

[mihireng]

I have filled Married Filling Jointly from 2012-2015. I wants to change it to Married Filling Separately for 2016 due to my wife's student loan debt. My question
1. If I change it for 2016, can I change it back to Married Filling Jointly in 2017? I can not change it forever or I can not change it for few years only
2. What are the consequences (I am aware of deduction) of changing filling status back and forth.

[Opus 17 · Accepted solution]

1. You can file any way you want each year.

2. Usually you pay more tax.  Several deductions and credits are limited or disallowed.  And if you are using Turbotax online, you will need two separate accounts and will be charged two fees, unless you qualify for free filing.  Installing turbotax on your own computer may be more cost effective.

Be careful that you don't lose more than you gain by filing separately so you can qualify for IBR.  Remember that interest continues to accrue, so you could end up paying more in the long run.  And if you manage to qualify for forgiveness (after 20 or 25 years) that forgiven amount becomes taxable income, plus all the tax savings you lose all those years.  Filing separately to qualify for IBR is not a simple decision and requires careful analysis and planning.

[mihireng]

Thank you. I did not know the forgiven amount become taxable income. My wife dont have any income right now after attempting to find job for last 2 years. Loan is 200k for which payment is $500/month as per our last year income (filed jointly). Also how is the tax rate is decided on that forgiven amount is it based on the end of 20 or 25 year? Is it based on the tax code on the final year of forgiveness? Truly appreciate your reply. Coming out of student loan debt is just impossible it seems, i thought going through 20-25 years would be it but as you explained it seems impossible.

[Opus 17]

So far, no one has actually had a loan forgiven under the 20- or 25-year IBR procedure, and Congress could change the rules again, so IBR should always come with an asterisk.

Generally speaking, cancelled debt is taxable as of the date the debt is cancelled -- you did not pay income tax on the loan proceeds when you received them originally, because the expectation was you would pay it back.  If you get to keep the money without paying it back, it becomes taxable income.  See here for more. <a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc431.html">https://www.irs.gov/taxtopics/tc431.html</a>

It's ordinary income added to your other income and taxed as part of that year's tax return, at whatever your tax rate is in the year the debt is cancelled.  Supposing you have $100,000 of income from work in the year 2036, and a $100,000 cancelled student loan, your taxable income for that year would be $200,000.

That's not to say IBR and loan forgiveness is a bad idea for everyone, but it needs to be carefully considered.  The cost of filing separately to remain at the lowest tier of IBR will vary depending on how much you earn and if you have children.  It may not make much difference as you are starting out (although neither of you can deduct student loan interest when filing separately) but as your family grows, you will be disallowed from the dependent care credit, tax-free and Roth IRA, and most of the college tuition credits for your eventual children.  See here <a rel="nofollow" target="_blank" href="https://www.betterment.com/resources/investment-strategy/taxes/married-filing-separately/">https://w...>

Once you have a couple of kids, you could be giving up $3000+ of deductions and credits to save the $6000 in loan payments, resulting in a higher cancelled loan amount and tax bill in the future too.

You will want to evaluate your situation every year.  It may be that separate filing to get the lowest IBR will work for you for a while.  Eventually you may need to file jointly for other tax reasons (if you stay in IBR you would have a higher payment of course, but would still keep your qualification for the forgiveness program, I think).

[mihireng]

I can not express in words how much I appreciate you taking time to reply. If I would, I could pay for the advice you are giving here. It is so depressing that we end up in the current situation we are in. We have 6 month daughter and this financial struggle is making things harder on us to move forward. Well this is a different forum, I just wanted to say how much I appreciate your time to answer and helping us to understand this complex situation