Spotlight on Student Loans:
“The hardest thing in the world to understand is the income tax.”
Albert Einstein hit the nail on the head with this oft-repeated quote. The U.S. Tax Code is long, complex, and ever-changing. This is especially true for people with higher incomes, changing life circumstances, and families to consider. I remember back when my dad, a small business owner, had to file his taxes manually every year—it took weeks. Nowadays, we have myriad digital tools, free tax online advice, and more to help us get the job done, but there are still hurdles to consider, especially if you’re dealing with the added quandary of student loan debt.
When preparing our taxes every spring, we look at the past year; if you’re paying off student loans, you also need to keep the current year in mind. While everyone else is looking back, you’re looking forward. Last year’s taxes determine this year’s monthly payment amounts via your annual Income Recertification (which we covered in last week’s post). For single folks, there’s not too much to do here, as you have fewer choices to make about your filing status.
For married couples with student loans, however, taxes take on an added layer of complexity: do you file jointly or separately? The answer is: it depends. Let’s look at a couple of examples.
Dr. Javier and Dr. Juanita are married and both are repaying federal student loans from med school. He’s on REPAYE, she’s on PAYE, and both are working full-time, earning attending physician’s salaries. If they file separately, his payments are huge while hers remain more modest. If they file jointly, his payments go down and hers go up, but they end up paying about $1,500 less per month in total, plus the added tax break MFJ.
Another case: Dr. Sam and Simon are married, both are repaying student loans, both are on PAYE, and are earning comparable incomes. If they file jointly, Simon’s payments are virtually nothing, while Dr. Sam’s are pretty significant because he has the lion’s share of loans. On the other hand, if they file separately, both pay about the same amount and save thousands in loans every year. Unless their tax liability is greater than the loan savings—as a result of filing separately—MFS is their best option.
Two different couples, two different situations, two different plans. Your tax advisor can help you figure out what filing status will save you the most money. Navigate can help you crunch the numbers on what payment plan will cost the least, too. Choosing the right tax and loan strategy can save you big money. Let us help you with that one-two punch and achieve your financial goals.