Tax Implications for Married Couples with Student Loans
Student loans have become a necessary aspect of earning a college degree for millions of students and graduates. For the last several years, college costs have continued a steady climb, leading to a need to rely heavily on borrowing to cover expenses.
Student loans can be easy to get, evidenced by the more than 44 million borrowers who owe a collective $1.5 trillion. However, they aren’t always a breeze to repay.
Although many borrowers qualify for student loan repayment programs that ease some of the burden, when finances are comingled with a spouse, making the best decision on student loan repayment becomes more complex.
Whether you are getting ready to tie the knot or you have been married for some time, understanding the tax implications of marriage on student loans is crucial. A small misstep may mean a far higher student loan expense. Tax filing selections play the most significant role in how you are able to manage your loans both now and in the future.
Filing Taxes Separately Married couples have the option to file taxes separately or jointly. Each comes with its own rules and guidelines, as well as benefits and drawbacks that should be understood.
Opting to file taxes separately as a married couple means that spouses file tax returns separately. In some cases, this tax filing selection is more beneficial for couples where one partner has significant itemized deductions, and the other does not. It allows the taxpayer to receive a higher deduction through itemization than he or she might with the standard deduction.
Filing separately may also be necessary for student loan borrowers on an income-driven repayment plan.
When a couple files married separate tax returns, an income-driven repayment plan recalculation that takes place each year only includes the borrower’s income, not the spouse. This can keep income-driven repayments at a lower level each month. However, filing taxes separately may increase a couple’s tax burden because the following could occur:
· Loss of valuable tax deductions, such as the student loan interest deduction
· A higher tax rate resulting in higher taxes owed
· Lower IRA contribution and deductibility limits
· Lower standard deduction
Filing Taxes Jointly The other option for married couples is filing taxes jointly. This tax filing status means that couples complete their tax returns together, as a unit. Filing jointly offers a higher standard deduction – double the single or separate filer’s standard deduction – and access to tax credits and other deductions including:
· Earned Income Tax Credit
· American Opportunity Education Tax Credit
· Lifetime Learning Tax Credit
· Higher deductions for IRA contributions
In many cases, married couples filing jointly fall into a lower tax bracket and therefore pay less in taxes overall, based on adjusted gross income (AGI). A couple’s AGI is gross income less any adjustments, including the student loan interest deduction. The student loan interest deduction allows borrowers to deduct interest paid on student loans if they meet specific criteria. Filing separately takes away the potential to utilize this deduction, which increases AGI for the borrow. These seemingly small adjustments can have a significant impact on taxes each year.
Although there are some notable benefits that come with this filing status wipe away the potential to keep an income-driven repayment plan based on only one borrower’s income. Instead, the monthly payment is determined using the income of both spouses. This can drastically increase the repayment amount moving forward. The Bottom Line
No two couples have the same financial circumstances, so answering the question should we file married jointly or separately is not a clear-cut process.
Instead, married couples who have student loan debt should recognize the tax consequences that exist with both filing scenarios. This starts with an open and honest discussion between partners about financial objectives individually and as a couple.
Once spouses are on the same page, borrowers who are on an income-driven repayment plan should take the time to calculate how filing married and joint may increase the monthly payment. However, an evaluation of the tax credits and deductions lost by filing separately also needs to be completed.
The only way to determine which filing status is best for a married couple with student loans is to run the numbers through each filing status and choose the one that provides the most financial benefit both now and in the long run.
Andy Kearns is a Content Analyst for LendEDU and works to produce personal finance content to help educate consumers across the globe. When he’s not writing, you can find Andy cheering on the new and improved Lakers, or somewhere on a beach.