I’m considering doing this for my wife and I, but I have a couple of questions in regards to doing so. If you have in the past dealt with a similar situation, I’d love to hear about it.
A large part of the reason is, I hope, to have her AGI taken into consideration for her student loans and my AGI is taken for my own. We both owe significant amounts and would like to consolidate our own.
Our income was over 80K, but a there’s over a 20K difference in what we earned. Does that matter?
Nevada is a Common Property State and we do own a house together. I know that half of our wages are considered for the other, so is it/would it be worth filing this way?
My step son, not officially adopted and goes by her maiden name, is not claimed by the biological father or has any ties to anyone but her. I know we lose tax credits, but could that be beneficial on her return?
We don’t have anything to itemize, which I understand to be one of the reasons to do this, but I’m looking to maximize our returns.
Thanks for any and all answers, hopefully I didn’t dump this in the wrong forum.
The primary reason that many couples file separately, is that they may be going through a divorce and may be legally separated and either party does not want to be legally obligated for the tax liability of the other.
FWIW MFJ > MFJ 99% of the time, but you could very well be the exception. You really will not know which is better unless you or a tax professional does it both ways and compares. I would at least plug all three scenarios into a quick calculator first.
I am not a tax professional and cannot give you tax advice. However, I also live in a community property state. When I asked an accountant about filing jointly vs. filing separately, the account said that in a nutshell “you always want to file jointly (unless you are in the middle of a divorce or something)”.
+1 that MFJ is usually better, though in your case the impact on student loans might have an effect (I have no idea what that impact is).
We did once benefit by filling separately - it allowed us to take an IRA deduction for Typo Knig, where we could not have done so if we’d filed jointly. This was nearly 25 year ago however; they closed that particular loophole the next year.
If you own a house and have a mortgage payment, I’m surprised you don’t have enough to itemize, especially with a dependent son (even if you can’t take the credit by filing separately, you can take his personal deduction).
I agree with modeling it both ways, jointly and separately, which will allow you to compare results. You could use one of the online tax prep sites (with 2 separate logins/accts) which don’t charge anything unless/until you print and/or file the return - that way you could at least see the refund/owed bottom line without paying. Some are pretty inexpensive to print the returns anyway so you could then compare the 1040’s line by line to see the differences. Some of the deductions and credits (that aren’t disallowed for MFS) phase out at higher income levels so that would probably be where MFS could be advantageous.
Thanks for the replies everyone. I am going to run through both scenarios for sure and may have to pony up the tax guy money just to see.
The main concern was whether filing this way would impact student loans, if you want to be rich don’t bother with a Master’s Social Worker and Secondary Ed of the same
Also good to know about another common property experience. Everyone has said it’s not a good option, but I’m hoping we might be that one case, this one time.
What is the deal with the student loans? Are they deductible or something? If so, does the deduction phase out at a higher income? You can tell it’s been a while since we had those to deal with, and they were not deductible in any way back then.
As a quick look-see, you might try TurboTax Online (or Tax Act or something) with both scenarios and see what that comes up with.
I think what the OP is interested in is consolidation and income-based repayment plans (payments as X percentage of income). For example, if incomes and loans are considered separately, the monthly payments would be 50,000 * X for one loan, and 30,000 * X for the other loan, totaling 80,000 * X. But, if each loan calculates based on their joint income, the payments would be 80,000 * 2 * X.
Or perhaps there’s an income ceiling (say, 40,000) for income based payment plans. The actual program details can get rather complicated…
Normally, delaying loan repayment is a bad idea in the long run, but federal consolidation loans are forgiven after something like 25 or 30 years. And in the meantime, interest is deductible, even without itemizing any other deductions.
I don’t live in a community property state, so can’t comment on that but we file separately for the reason the OP is looking at. There are a couple things we miss out on (deduction of childcare and student loan interest) but we’re saving 10s of thousands of dollars on my wife’s student loans.
Starting a couple years ago, the new income based repayment plan was created for federal consolidated student loans. Basically, they look at your tax return and decide what payment is reasonable for you to make. Your actual loan amount factors more into whether you qualify at all than what your payment is (I believe). My wife finished her masters in social work as that happened and qualifies for it. However, if we filed jointly my income would be included in the calculation and she would no longer qualify.
To sort of explain why the filing separately loophole exists, we weren’t married when she graduated. Before we learned that by filing separately only her income is counted, we were planning to not get married at all.
Additionally, because she’s a social worker for a non-profit whatever is left of her loans after 10 years will be wiped out. As her income-based payment is a little below the interest, we come out way ahead by not filing jointly. For people who don’t qualify for that, the loans are erased after 20 years.
So whether it’s worth it or not is more than a matter of which causes you to pay less taxes. It’s whatever you save on your student loan payment minus the more you pay by filing separately.
