Married Couples Taxes Filing: Should It be Filed Separately or Jointly?.
Married Couples Taxes Filing: This is the most common question asked these days by married couples. This is a very essential question to ask. Which is because, deciding how to file a tax as an household affects how much you pay in taxes, as well as your student loan payments.
On this article, I took my time in deciding for which is better in various instances. And also considering how it affects your student loan payment. Read on.
Filing Taxes Separately and Relating To Your Student Loan Payments
When someone is on an income-driven repayment (IDR) plan, the payments are calculated based on discretionary income. The higher the income, the higher the student loan payments. The lower the income, the lower the payments.
The income used to calculate the student loan payment is generally taken from the borrower’s latest tax return. If the borrower is married to someone who makes an income and they file their taxes jointly, the loan servicer will use their household income to calculate the payment.
But there are two decent repayment plans in particular that allow the borrower to file their taxes separately: Pay As You Earn (PAYE) and Income-Based Repayment (IBR). On these plans, the income-driven payment is based on only the borrower’s earnings and not their spouse’s.
Filling Taxes Separately or Jointly Which Is Better
Filing separately if both spouses have federal student loan debt eligible for IDR doesn’t make much sense. There are a few exceptions, but this is really only a decision for married couples where one of them has student loans.
The equation we use here is a holistic one based on what’s best for the household, not one spouse. We need to look at the entire household taxes and student loan payments to see which method would be better.
Generally speaking, we know student loan payments will be lower if couples file separately, but they’ll most likely pay more taxes as a household.
If the result is a positive number, then married filing separately will give the most household savings net of taxes. If it’s negative, then married filing jointly will save the household the most money.
Pros & Cons of Filing Separately In Marriage
Your spouse’s income won’t be considered when determining your monthly payment for an income-driven repayment plan, keeping the payment lower (for all plans except REPAYE).
You may not have to take the student loan interest deduction into account if you claim the standard deduction — that is, if your itemized deductions would be less than $12,200 individually or $24,400 together for 2019.
You cannot claim the student loan interest tax deduction.
Income-driven repayment implications only affect federal student loans. Your filing status won’t affect payments for private student loans.
Advantages of Filing Jointly
There are many advantages to filing a joint tax return with your spouse. The IRS gives joint filers one of the largest standard deductions each year, allowing them to deduct a significant amount of their income immediately.
Couples who file together can usually qualify for multiple tax credits such as the:
Earned Income Tax Credit
American Opportunity and Lifetime Learning Education Tax Credits
Exclusion or credit for adoption expenses
Joint filers mostly receive higher income thresholds for certain taxes and deductions—this means they can earn a larger amount of income and potentially qualify for certain tax breaks.
When to Consider Filling Separately
They are many instances to consider filing separately as married couples, which will be of benefit to you. These are given below;
Divorce or Separation
This was the original reason for which this status was created. For a variety of reasons, divorcing or separated couples may not be willing to file their taxes jointly.
Filing separately also may be appropriate if one spouse suspects the other of tax evasion. In that case, the innocent spouse should file separately to avoid potential tax liability for the other spouse. This status can also be elected by one spouse if the other refuses to file.
Diverse Pay or Deduction Scales
Protecting yourself from a negative outcome isn’t the only reason to file separately. Today, even the most happily married couple may come out ahead by choosing this route.
The primary instance is with childless couples, in which one spouse has considerably higher income and the other spouse has substantial potential itemized deductions.
You Participate In Income Driven Repayment Plans For Student Loans.
If you and/or your spouse is part of an income based repayment plan for outstanding student loans, filing separately may mean lower monthly loan payments.
Be careful with this one though: while it may be beneficial right now to have lower payments, keep in mind that these lower payments could mean higher tax implications in the future if the debt is forgiven. Debt forgiveness is generally taxable under current tax law.
To Separate Your Tax Liability from Your Spouse
It may be preferable to file separately when you need to separate your tax liability from your spouse’s. Signing a joint tax return makes you both responsible for the accuracy and completeness of the entire return and obligates you for any current or future tax liability.
If you file separately, you will only be responsible for the accuracy and payment of taxes for your own return. If you know or suspect that your spouse is omitting income or overstating deductions and/or credits, you may want to file separately.
You Live In a Community Property State
State income taxes can also impact your decision. In some states, considering the total federal and state tax liability may change the numbers in favor of filing separately.
When one or both spouses live in a community property state, special rules apply for allocating income and deductions between each spouse’s tax return. Each spouse generally reports half of the total income and half of the deductions on each tax return.
Community property states are: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
What Do You Lose By Filing Separately?
Ultimately, filing a joint return is typically more beneficial, particularly in light of the recent changes to the tax code. When you choose not to file jointly, you limit or altogether forgo several tax breaks and deductions including:
The child and dependent care tax credit
The adoption credit
The Earned Income Credit
Tax-free exclusion of U.S. bond interest
Tax-free exclusion of Social Security benefits
The credit for the elderly and disabled
The deduction for college tuition expenses
The student loan interest deduction
The American Opportunity Credit and Lifetime Learning Credit for higher education expenses
The deduction of net capital losses
Traditional IRA deductions
Roth IRA contributions
The Bottom line is everyone’s tax situation is different and can be complex. Therefore, the financial benefits of filing a joint tax return will outweigh filing separately, but it is important to know and understand your options.
And as with all tax matters, you will want to look at the numbers each year to find out which filing status will give you the greatest benefit. Moreover, if you have questions about your specific circumstances, seek the advice of a professional.