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Married filing separately (MFS) is a tax filing option available to married couples who choose to file their tax returns separately rather than jointly. There are several reasons why couples may choose to file separately. One example of a potential benefit is the ability to lower student loan payments. In this article, we will explore how the tax filing status, married filing separately, can help reduce student loan payments and what to consider before making this decision.
When you file your taxes as a married couple, your income is combined, and you are jointly responsible for any taxes owed. This also means that your income is used to calculate your student loan payments if you are enrolled in an income-driven repayment plan. Income-driven repayment plans are designed to make your monthly student loan payments more manageable by capping them at a percentage of your discretionary income. If your combined household’s income is high, your resulting monthly payments can be substantial.
By choosing to file separately, each spouse's income is calculated separately, and only the income of the borrower is used to calculate student loan payments. This can be especially beneficial if one spouse (typically the one without the student loans) has significantly higher income than the other, as the lower income can help reduce the borrower's student loan payments.
For example, suppose a married couple has a combined income of $150,000 per year, and the borrower has $100,000 in student loan debt. If they file their taxes jointly, their income-driven repayment plan will be calculated based on their combined income of $150,000, resulting in a monthly payment of around $1,200 per month. However, if they choose to file separately, the borrower's monthly payment would be calculated based only on their income, which would be around $600 per month if they earned $75,000 per year.
While this may seem like a simple solution to reducing student loan payments, there are several factors to consider before making the decision to file separately. First, filing separately may result in higher combined taxes for some couples, as they may not be eligible for certain tax credits or deductions. Additionally, filing separately can also affect eligibility for certain student loan forgiveness programs.
Furthermore, choosing to file separately can impact other areas of your financial life, such as your ability to contribute to retirement accounts or your eligibility for certain types of insurance. Before making any decisions about filing status, it is essential to consult with a tax professional or financial advisor to weigh the pros and cons of each option and determine the best course of action for your unique situation.
Filing taxes separately can be a viable option for reducing student loan payments, particularly for couples with significant income disparities. However, it is crucial to consider all the factors involved, including tax implications and eligibility for student loan forgiveness programs. Ultimately, consulting with a financial professional can help you make an informed decision that aligns with your financial goals and priorities.
Don’t hesitate to reach out to our team at Aspire Planning Associates if you have any questions! Call us at (925) 938-2023, and schedule an appointment today. We look forward to serving you!
