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File Taxes Jointly or Separately: What to Do When You’re Married with Student Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Married couples with student loans must make a difficult decision when they file their tax returns. They can choose to file jointly, which often leads to a lower tax bill. Or they can file separately, which may result in a higher tax bill, but smaller student loan payments. So which decision will save the most money?

First, let’s discuss the difference between the two filing statuses available to married couples.

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Married filing jointly

Married couples always have the option to file jointly. In most cases, this filing status results in a lower tax bill. The IRS strongly encourages couples to file joint returns by extending several tax breaks to joint filers, including a larger standard deduction and higher income thresholds for certain taxes and deductions.

Married filing separately

Because married couples are not required to file jointly, they can choose to file separately, where each spouse is taxed separately on the income he or she earned. However, this filing status typically results in a higher tax rate and the loss of certain deductions and credits. However, if one or both of the spouses have student loans with income-based repayment plans, filing separately could be beneficial if it results in lower student loan payments.

For help figuring out which filing status is better for married couples with student loans, we reached out to Mark Kantrowitz, publisher and Vice President of Strategy at Cappex.com. Kantrowitz knows quite a bit about student loans and taxes. He’s testified before Congress and federal and state agencies on several occasions, including testimony before the Senate Banking Committee that led to the passage of the Ensuring Continued Access to Student Loans Act of 2008. He’s also written 11 books, including four bestsellers about scholarships, the FAFSA, and student financial aid.

Two Advantages to Filing Taxes Jointly:

  • Most education benefits are available only if married taxpayers file a joint return. This can affect the American opportunity tax credit, the lifetime learning credit, the tuition and fees deduction (which Congress let expire as of January 1, 2017, but is still available for 2016 returns), and the student loan interest deduction.
  • Couples taking the maximum student loan interest deduction of $2,500 in a 25% tax bracket would save $625 in taxes. But this “above the line” deduction also reduces Adjusted Gross Income (AGI), which could yield additional tax benefits (e.g., greater benefits for deductions that are phased out based on AGI, lower thresholds for certain itemized deductions such as medical expenses, and miscellaneous itemized deductions).

However, there is a potential downside to filing jointly for couples with student loans.

Income-driven repayment plans use your income to determine your minimum monthly payment. Generally, your payment amount under an income-based repayment plan is a percentage of your discretionary income (the difference between your AGI and 150% of the poverty guideline amount for your state of residence and family size, divided by 12).

  • If you are a new borrower on or after July 1, 2014, payments are generally limited to 10% of your discretionary income but never more than the 10-year Standard Repayment Plan amount.
  • If you are not a new borrower on or after July 1, 2014, payments are generally limited to 15% of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.

Because filing jointly will increase your discretionary income if your spouse is also earning money, your required student loan payment will typically increase as well. In some cases, the difference is negligible; in others, this can add up to a pretty significant cost difference.

“Calculating the trade-offs of income-driven repayment plans versus the student loan interest deduction and other benefits is challenging,” Kantrowitz says, “in part because the monthly payment under income-driven repayment depends on the borrower’s future income trajectory and inflation, not just the inclusion/exclusion of spousal income.”

Fortunately, some tools can help you run the numbers.

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An example: Meet Joe and Sally

Here’s a simple scenario that shows how a change in filing status can save on taxes but cost more on student loans:

  • Joe and Sally are married with no children.
  • They live in Florida (no state income tax).
  • Joe is making $35,000 per year and has $15,000 of student loan debt with a 6.8% interest rate.
  • Sally is making $75,000 per year and has $60,000 of student loan debt with a 6.8% interest rate.

First, we can estimate Joe and Sally’s tax liability for filing jointly versus separately. TurboTax’s TaxCaster tool makes this pretty easy. Here’s what we get when run their numbers using 2016 tax rates:

  • Filing jointly, Joe and Sally would owe $13,249 in federal taxes.
  • Filing separately, they would owe $15,178.

So they would save just over $1,900 in federal taxes by filing jointly. But how would filing jointly affect their student loan payments?

We can use a student loan repayment estimator like the one provided by the office of Federal Student Aid to find out. Here’s what we get when we run the numbers and choose the Income-Based Repayment option, assuming they are new borrowers on or after July 1, 2014:

  • Filing jointly, Joe’s minimum required monthly student loan payment under a standard repayment plan would be $143, and Sally’s would be $571, for a total of $714 per month.
  • Filing separately, Joe’s minimum required monthly student loan payment would be $141, and Sally’s would be $474, for a total of $615 per month.

Over the course of a year, Joe and Sally would only save $1,188 on their student loan payments by filing separately. Even with the additional loan payments they would have to make, filing jointly would save them $712 more than filing separately.

What’s best for your situation?

Every situation is different. The simple example above comes out in favor of filing jointly, but you will need to run your own numbers to figure out what is right for you. Here are additional tips to help you figure it out:

  1. Know how much you owe. Make a list of all loan balances, interest rates, and the type of each student loan you have. You can find your federal student loans on the National Student Loan Data System. You can find information on your private student loans by looking at a recent statement.
  2. Estimate your student loan payment options. Using a student loan repayment estimator like the one mentioned above, determine your required payments when filing separately versus jointly.
  3. Calculate your tax liability. Use a tool like TurboTax’s TaxCaster or 1040.com’s Free Tax Calculator to calculate your federal and state tax liability when filing separately versus jointly.
  4. Be aware of long-term consequences. Filing separately might result in lower monthly payments today but more interest paid over time. If you make it to the 20- or 25-year forgiveness point, that could have tax implications down the line. Kantrowitz points out that “forgiveness is taxable under current law, causing a smaller tax debt to substitute for education debt. The main exception is borrowers who will qualify for public student loan forgiveness, which occurs after 10 years and is tax-free under current law.” Keep those long-term consequences in mind as you make a decision.
  5. Consider steps to lower your AGI. Your eligibility for income-driven student loan repayment plans depends on your AGI, which is essentially your total income minus certain deductions. You can reduce this number, and potentially lower both your tax bill and your required student loan payment, by doing things like contributing to a 401(k), IRA, or Health Savings Account.
  6. Keep the big picture in mind. These decisions are just one part of your overall financial situation. Keep your eyes on your big long-term goals and make your decision based on what helps you reach those goals fastest.

Other unique situations

There are a few unique situations that make deciding whether to file jointly or separately a little more complicated. Do any of these situations apply to you?

Divorce and legal separation

Sometimes, determining marital status to file tax returns isn’t cut and dried. What happens when you and your spouse are separated or going through a divorce at year end? In this case, your filing status depends on your marital status on the last day of the tax year.

You are considered married if you are separated but haven’t obtained a final decree of divorce or separate maintenance agreement by the last day of the tax year. In this case, you can choose to file married filing jointly or married filing separately.

You and your spouse are considered unmarried for the entire year if you obtained a final decree of divorce or are legally separated under a separate maintenance agreement by the last day of the tax year. You must follow your state tax law to determine if you are divorced or legally separated. In this case, your filing status would be single or head of household.

Pay as You Earn repayment plans

Pay as You Earn (PAYE) is a repayment plan with monthly payments that are limited to 10% of your discretionary income. To qualify and to continue to make income-based payments under this plan, you must have a partial financial hardship and have borrowed your first federal student loan after October 1, 2007. Kantrowitz says the PAYE plan bases repayment on the combined income of married couples, regardless of tax filing status.

Unpaid taxes, child support, or defaulted federal student loans

If you or your spouse have unpaid back taxes, child support, or defaulted federal student loans, joint income tax refunds may be diverted to pay for those items through the Treasury Offset Program. “Spouses can appeal to retain their share of the federal income tax refund,” Kantrowitz says, “but it is simpler if they file separate returns.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Don’t Use Your Tax Refund as Forced Savings

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Internal Revenue Service IRS building in Washington DC forced savings
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Getting a fat tax refund from the IRS may put a big smile on your face. But before you get too excited, heed the words of hip-hop legend the Notorious B.I.G.: mo’ money, mo’ problems.

A big refund check isn’t a sign you’re getting free money from Uncle Sam—in fact, quite the opposite. It means that throughout the year, you’ve granted the government an interest-free loan from your paycheck, and now you’re getting the principal back in one lump sum. You’re not making any more money than if you had taken that cash, buried it in your yard and dug it up in April. Thankfully, there’s a better way.

Don’t use the IRS as a forced savings account

Most Americans only think about their federal income tax once a year, ahead of the April 15 tax deadline. But it’s important to understand that you’re paying income taxes with every pay period. For workers receiving wages, state and federal income tax is withheld by employers with each paycheck (It gets even more complicated if you’re self-employed or a freelancer; you’ll usually have to pay an estimated quarterly tax).

Your employer calculates how much of your paycheck to withhold, ensuring you pay your annual tax bill over time, based on the information you filled out on your W-4 when you start a job. Many people fill out the form without a second thought, but it has an impact on your financial life because it determines the size of your withholding.

On your W-4, you claim a certain number of tax allowances. The more allowances you claim, the less money is withheld from your paycheck. The general rule is that you can claim one allowance for the following:

  • Yourself
  • Your spouse
  • Any dependents you can claim (this will usually be your children, but can be anyone who qualifies under IRS rules)

This list above provides a good baseline for claiming allowances, but maxing out your claims isn’t as simple as taking a tally of everyone at the dinner table.

Claim the right amount of allowances to avoid overpaying

When claiming allowances on your W-4, your goal should be to land on the amount that matches your federal tax liability—how much you owe the government in taxes—as closely as possible. If you do it right, your tax liability should be divvied up precisely and paid off via withholding in each pay period. Get it right, and you won’t receive a tax refund.

How do you determine the correct amount of allowances to claim to avoid the ritual of forced savings and refund checks? The IRS provides personal worksheets with the W-4 form that can help you calculate the maximum amount of allowances you’re entitled to.

Answer the following questions in order to figure out how many allowances you should claim.

Should I claim the Child Tax Credit?

As alluded to earlier, claiming just one allowance for each of your children may mean you aren’t taking all the allowances you could. If you’re claiming a tax credit for each child, the number of allowances you claim for each child depends on your total income, and if you’re filing as a single person or married filing jointly.

Filing Single Married Filing JointlyNumber of Allowances Per Child
Less than $71,201Less than $103,351

4

$71,201 to $179,050 $103,351 to $345,850

2

$179,051 to $200,000 $345,851 to $400,000

1

Higher than $200,000Higher than $400,000

0

You should also take into account tax credits you will claim for eligible dependents who aren’t your children, which affects the number of allowances you can claim.

Filing Single Married Filing JointlyNumber of Allowances Per Child
Less than $71,201Less than $103,351

1

$71,201 to $179,050$103,351 to $345,8501 for every 2 dependents ( if you only had one dependent, you would claim 0 allowances. If you had 2 dependents, you would claim 1 allowance)
Higher than $179,050Higher than $345,850

0

Do I have more than one job? Does my spouse work?

If you’ve fully embraced the cult of the side hustle — willingly or not — or if your spouse also works, and the combined income from all of these jobs exceeds $53,000, you may want to claim additional allowances. The Two Earners/Multiple Jobs worksheet that comes with the W-4 walks you through the many allowances you could claim, but in general the number of allowances you can claim is based on the wages you earn from your lowest-paying job.

Am I claiming itemized deductions?

The Tax Cuts and Jobs Act passed by Congress and signed into law by President Trump at the end of 2017 changed the calculus for many taxpayers who normally devote hours to claiming itemized deductions. “There will be a lot of disconnect this year for people who have relied on itemized deductions that are no longer deductible,” said Michael Goldfine, CPA based out of New York, NY.

The changes to the tax code in 2017 nearly doubled the standard deduction, from $6,350 to $12,000 for single filers (and from $12,700 to $24,000 for married couples filing jointly). This means it usually makes more financial sense to simply claim the standard deduction. If you do that, you wouldn’t claim an additional allowance on your W-4.

However, if you believe the value of itemized deductions you can claim exceeds what you would get with the standard deduction, then the amount greater than the standard deduction figures in to whether or not you should take another allowance.

What other deductions or adjustments should I claim?

You’ll also want to think long and hard about any income you’ve earned that’s not from wages and isn’t subject to federal withholding. Interest earned from bank accounts or dividend payments from stocks, for example, could all contribute to how many allowances you can claim. By filling out the Deductions, Adjustments and Additional Income worksheet with Form W-4, you can estimate the number of allowances this income entitles you to claim.

Don’t claim more allowances than you’re owed

While withholding too much and not claiming as many allowances as your circumstances allow gives the federal government an interest free loan, the opposite — claiming too many allowances and not withholding enough — isn’t ideal either.

If your employer doesn’t withhold enough money from your wages, you can expect to receive a bill instead of a refund check. And if you owe the government more than $1,000, you may also have to pay a penalty fee (which the IRS will happily calculate for you). This is especially true if this isn’t the first time you’ve come up short with Uncle Sam.

“If you owed money last year, and you owe money again this year, you’re going to get underpayment penalties,” said George Dimov, CPA at Dimov Tax Associates in New York City. “That applies to the IRS and to the states. In that case, if you don’t want a penalty, you should overpay.”

The amount the IRS will charge you varies on your individual circumstances, but according to Dimov it’s generally 2% to 3% of the amount you still owe the government — “the IRS has its own proprietary formula to estimate [the penalty],” he added.

In general, you won’t have to pay a penalty if:

  • The amount you owe the IRS is less than $1,000
  • You’ve paid 90% of your tax liability (the IRS lowered this threshold to 80% for the 2018 tax year only to take into consideration how changes to the tax law could confuse tax filers)
  • You paid 100% of your tax liability in the previous tax year

While the fact that you have $1,000 of leeway before incurring an underpayment penalty may tempt you to err on the side of claiming more allowances than you’re strictly entitled, keep in mind one allowance generally equals $4,200. The best way to avoid claiming too many allowances is to only claim those the IRS says you can, per the worksheets included with form W-4.

How Americans are spending their forced savings

Now that you know how to dial in the proper amount of allowances to claim and no longer give the federal government more money than it’s owed throughout the year, you can start putting your income to better use.

The average size of a tax refund so far for 2018 filings is $2,873. According to a National Retail Federation survey of tax filers, 49% of those expecting a refund this year plan on putting that refund money into some sort of savings account or product.

That’s great, except they’ve already lost out on a year’s worth of interest because of overpaying Uncle Sam with each paycheck. If they had claimed more allowances and placed the extra money from their paycheck into a common savings product, here’s how much they would have earned via interest.

 1-Year CDSavings AccountTax Refund
Interest Earned1.373%*0.272%*0
Money earned after a year$39.72$7.83$0

*APY for the 1-year CD and savings account are both based on national averages according to data from DepositAccounts.com as of April 2019; MagnifyMoney and DepositAccounts.com are both owned by LendingTree. Money earned after a year calculated assuming a deposit of $2,873 into either product.

Granted, the money earned from either a CD or a savings account won’t bump you into a higher tax bracket, but think of it this way — would you put your money in an account that offered zero interest? Because that’s what you’re doing when you don’t claim the proper amount of allowances on your W-4 and let the government hold on to your hard-earned cash for a year before paying it back in a big refund check.

The bottom line on your tax refund

Telling people they should feel bad about receiving a big tax refund ranks just above telling children Santa is a lie. And just like believing in Santa, getting a refund check for thousands of dollars might just give some people a warm, fuzzy feeling that justifies the cost.

However, the view through the cold, calculating eyes of a personal finance expert suggests that getting a large tax refund is a lost opportunity to invest money where it earns interest, such as a savings account or CD. You have to decide whether the excitement of that tax refund is worth the money you’re losing out on.

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James Ellis
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James Ellis is a writer at MagnifyMoney. You can email James here

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Can’t pay your taxes? There’s a taxpayer advocate who can help

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Not receiving a tax refund can be disappointing enough, especially if you look forward to getting a little financial boost each April.

What if you not only don’t get a refund, but you actually end up owing money? Even worse, what happens when you owe more money than you can afford to pay? Going to bat against the Internal Revenue Service by yourself can be annoying at best and downright traumatizing at worst. Luckily, you don’t always have to go through the process alone.

How a Taxpayer advocate can help resolve your tax problem

When you deal with the IRS, it’s possible that you’ll connect with an IRS representative who is helpful and can help you straighten out your tax problems. Other times, unfortunately, you may wait a long time to hear back from the agency, feel that they’re not addressing your concerns or unable to reach an agreement with the IRS on how much you owe.

The federal government has created a free, independent program called the Taxpayer Advocate Service to help. The Taxpayer Advocate Service is not for everyone who owes back taxes — it was created to help specifically when you are having problems dealing with the IRS.

Consider contacting the Taxpayer Advocate Service (TAS) if any of the following are true:

  • Your tax problem is causing you financial hardship.
  • The IRS is not responding in a timely manner.
  • You believe the IRS is not respecting your taxpayer rights. Your taxpayer rights include the right to be informed of IRS decisions about your account, the right to quality service (prompt, courteous and professional assistance), the right to pay no more than the correct amount of tax, rights to privacy and confidentiality, and other rights in the Taxpayer Bill of Rights.

How to get help from the TAS

Start by visiting the Taxpayer Advocate website, which includes answers to many questions and common tax problems. If you still need help resolving problems with the IRS, use the map feature on the website to find contact information for your local TAS office.
It’s not guaranteed that the TAS will accept your case. However, the TAS does have the power to help you when you’ve tried unsuccessfully to resolve your problem with the IRS by yourself. They can do the most good when your case falls into one of these categories:

It’s not guaranteed that the TAS will accept your case. However, the TAS does have the power to help you when you’ve tried unsuccessfully to resolve your problem with the IRS by yourself. They can do the most good when your case falls into one of these categories:

  • If your case needs to be processed quickly in order to avoid causing you more financial harm, the TAS can speed things up. For example, the IRS may need to remove a levy or release a lien when you are having a financial emergency, difficulty or hardship.
  • If your case is complex and different steps and units of the IRS are involved, the TAS can help coordinate the various parts of the process.
  • If you have a unique case that doesn’t work well with the “one size fits all” approach of the IRS, or you feel the IRS isn’t listening to you, the TAS can work on your behalf. They may try to have the IRS issue new guidance, if necessary, for your circumstances.

If the TAS determines that you qualify for help, you will be assigned your own advocate who will work on your case until it is resolved. You can talk to your caseworker by phone, or visit your local TAS office.

5 ways to resolve a tax debt on your own

Don’t panic over a bill from the IRS. You’re not the first person to get behind on taxes, and the IRS has specific procedures to help people like you get back on track. They don’t put people in jail for simply owing taxes; you’ll have to ignore a lot of notices or otherwise test the patience of the IRS before they levy your bank account or take other drastic action.

And not every tax problem means you need the help of a taxpayer advocate. You may be able to resolve your issues in one of these ways:

  1. Make sure you actually owe the tax. Read your tax return carefully from front to back. Look for errors, such as income counted twice, or missed deductions and credits. If you received a letter from the IRS stating that you owe a tax, make sure you understand what you owe and why. In some cases, you may just need to file an amended return, or send a letter of explanation to the IRS.
  2. Pay as much of the balance due as you can afford. Determine how much you can pay without jeopardizing your other expenses, including current taxes. The more you can pay now, the less you’ll pay in penalties and interest. You have several options for paying the IRS, including electronic funds transfer, a paper check or debit or credit card. (Be careful paying by card. It will cost you extra fees, and in some cases, the credit card interest rate is higher than you would pay to the IRS.)
  3. Pay off your tax bill within 120 days, if possible. You don’t need a formal payment plan if you only need up to 120 days to pay the full amount. The penalties and interest will continue to add up until your balance is paid.
  4. Ask for an installment plan if you need more than 120 days to pay. You can apply online for a formal payment plan. You’ll have to pay an application fee, plus penalties and interest until your debt is paid in full.
  5. Consider an Offer In Compromise (OIC). If you are way over your head in tax debt, you can request an Offer in Compromise so you can pay less than the total amount owed. You should only ask for an OIC as a last resort, and you will have to pay fees and fill out forms to apply. Use the IRS Offer in Compromise Pre-Qualifier to see if you are eligible to apply.

If you are in financial distress and can’t make any tax payments right now, the IRS may set your account as “Currently Not Collectible.” This doesn’t resolve your debt, and the interest and penalties continue to accrue. However, it does stop IRS collection activities as long as your account is in this status. You generally do not need a taxpayer advocate to have the IRS make this determination. To request this status, contact the IRS at 1-800-829-1040 or the phone number on correspondence you have received from the IRS. You may be required to complete a Collection Information Statement and submit documentation.

Avoid future problems with the Internal Revenue Service

If you’ve ever had more than the briefest encounters with the IRS, you’ll appreciate the importance of avoiding such encounters as much as possible in the future. Read these tips to see how you can avoid most future tax problems:

  • Learn about taxes. The tax code has changed significantly thanks to recent tax reform initiatives, and you need to know how the changes affect you.
  • Plan and organize your finances. You can only do so much about your taxes after the end of the year, when you’re scrambling to find receipts and paperwork and possibly getting hit by a big tax bill. Try to estimate your tax year ahead so you can do better tax planning and avoid surprises.
  • Prepare and review your tax return carefully. Making mistakes, such as not including all your income that is reported on 1099 forms, is the fastest way to get the attention of the IRS. If you prepare your own return, use tax software to improve accuracy. It’s also important to always file your return on time, even if you can’t pay the balance.
  • Adjust your income tax withholding or estimated tax payments. If you owed money when you filed your return, you may need to pay more throughout the year. Not only will you avoid a large one-time bill, but you may save interest and penalties as well.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sally Herigstad
Sally Herigstad |

Sally Herigstad is a writer at MagnifyMoney. You can email Sally here