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Student loans are the biggest exception to "joint saves more": count the extra payments too
After getting married, most people file taxes jointly because the standard deduction is higher. But if one partner has a large federal student loan and is on an income-driven repayment plan, this conclusion might be reversed.
The issue lies with IDR
Income-Driven Repayment (IDR)monthly payments are calculated based on your income.
Andfiling jointly includes your spouse's income.To put it another way: your "income" instantly becomes your combined total income, and your monthly payment could go up quite a bit.
It comes down to a very simple calculation: the taxes you save by filing jointly might be far less than the extra amount you end up paying on your student loans.
You have to calculate both side by side.
The right way to compare isn't "which status saves more on taxes," but rather:
(Taxes saved from filing jointly) − (Extra annual student loan amount paid after filing jointly) vs The outcome of filing separately
If the extra student loan payments exceed what you save on taxes, filing separately is more cost-effective overall.
Filing separately comes with a trade-off too
You can't just look at the student loan side. Married Filing Separately will lose or limit a few things:
- Certain tax credits cannot be claimed
- Lower standard deduction
- In community property states, filing separately also means dealing with the tricky "50/50 income split" calculation (see item 73 on the list)
So this is really a decision where you need to run the numbers, not just go by feel.
What to do
- Check your IDR plan type firstRewritten: Different IDR plans handle a spouse's income a bit differently, and some plans will look only at the borrower's own income when you file separately.
- Run the numbers twice using tax softwareRewritten: Try running the calculations both ways, once filing jointly and once separately, to see how much difference there is in the tax amount.
- Figure out the student loan payment differenceRewritten: You can go to studentaid.gov and use the repayment estimator, entering "your own income" and "combined income" separately to test out your monthly payment amounts.
- Subtract the two numbers
If the amount is large or your situation is complex (for example, if you are also planning around PSLF), hire a CPA to run the numbers once. That fee is usually much less than the cost of making the wrong choice.
There is also the issue of timing
Rewritten: IDR requires annual income recertification. If you got married in the middle of the year, your first year of recertification might still look at your pre marriage income, but the next recertification will reflect your combined situation.
Knowing this in advance can keep you from being blindsided when your monthly payment suddenly jumps up one month.
By the way: this also affects your W-4.
Regardless of which filing method you choose in the end, you should recalculate your tax withholding after getting married (see item 75 on the checklist). If both spouses in a dual-income household fill out their W-4 as single, you can easily end up with under-withholding after filing jointly.
The bottom line
If you have a large federal student loan on IDR, do not assume filing jointly is automatically cheaper. I recommend comparing your "tax savings" and "extra loan payments" side by side on paper to see how the numbers actually work out.