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Married Filing Separately for Student Loans: How your taxes are affected by your filing status. Thumbnail

Married Filing Separately for Student Loans: How your taxes are affected by your filing status.

Choosing the right filing status on your tax return has a real effect on how much in taxes you owe and your ability to take certain tax deductions. Choosing between married filing separately (MFS) and married filing jointly (MFJ) can also make a big difference on what your student loan payment is each month if you have elected to be on an income based repayment plan.

If you are in one of the following income based repayment student loan plans then you may benefit from filing your taxes with the filing status of Married filing separately (MFS).

  • Income Contingent Repayment
  • Income Based Repayment
  • PAYE
  • Repaye

The REPAYE plan takes into account your joint income whether you file separately or jointly. But there still can be reasons / benefits to file separately while in the REPAYE plan if both spouses have loans and choose different plans.  

Typically when faced with filing separately vs jointly both you and your spouse will have income.  

Here can be the two competing options for you to choose from:

  • You can file jointly and get a higher tax refund (pay less taxes) but will have to pay more for your student loan payment each month.
  • You can file separately and get a lower tax refund (pay more taxes) but have a lower monthly student loan payment each month.

Making sure you develop a student loan repayment plan / tax plan is essential if this is the case.

Married Filing Jointly (MFJ) vs Married Filing Separately (MFS): How will my taxes be affected?

There are certain restrictions / adjustments to tax deductions when filing married separately.   

Here are some of the tax items you will see affected on your tax return.

1.Child and Dependent Care Credit

This is a tax credit for for paying child daycare expenses.  The tax credit is 20% - 35% of qualified child care expenses up to $3,000 per child up to 2 children. 

If you file separately and actually aren’t separated meaning you are doing so for student loan purposes then you don’t get this credit at all.   

Let’s say you are a dentist and your spouse is an attorney with joint incomes totaling $300,000.  You have 3 children and pay $15,000 in total childcare expenses per year.  Your child care credit would be $6,000 (2 or more children) * 20% or $1200.  This means you get a $1200 credit off your taxes.  

MFJ: $1200 Tax savings
MFS: $0 Tax Savings

Planning Tip: If either of you work for a company that offers a cafeteria plan or flexible savings account you can elect to put up to $2,500 for dependent care if filing separately. It’s normally $5,000 but since you are filing separately you get half. If your spouse works for a company that also has the same option then you can do another $2,500.

If you own a dental practice then you won’t have the ability to have a cafeteria plan or FSA for yourself since you are the owner.

2.Student Loan Deductions

The student loan deduction is $2500 if your adjusted income is less than $130,000 filing MFJ. If you file as MFS you are not eligible for this deduction on either MFS tax returns.   

This deduction is a bit of a marriage penalty as is. If you were both single and within the income limits you would both be able to take a $2500 tax deduction. However when married there is only one $2500 deduction as is regardless of whether you both have loans and are paying interest or not. Seems unfair.  

What we find is many Dentists are already phased out of taking this deduction due to their income so this may not even affect the decision. 

MFJ: $2500 Deduction (Maybe)
MFS: $0

3.Qualified Business Income Deduction: QBI

This could be one of the biggest factors for a Dentist, Optometrist or Physician that owns their own practice and/ or has self-employment income.  

Under current law there is a 20% tax deduction on your qualified business income if you see patients and earn under certain thresholds.  

Married Filing Jointly QBI Income         < $321,400 Eligible for up to 20% Deduction
Married Filing Separately QBI Income  < $160,700 Eligible for up to 20% Deduction

Let’s say that you have a dental practice that is an S-Corp. Your total income is $300,000 and your spouse stays at home. Your spouse has $200,000 in student loans so you are thinking about filing separately to lower her student loan payment. Your income is made up of a salary of $150,000 and K-1 profits from your practice of $150,000.  

MFJ: $30,000 Tax Deduction
MFS: $0 Tax Deduction (Over income limits)

For more info about the QBI, check out: 20% Tax Deduction for Practice Owners

4. Married Filing Separately Tax Credit Reduction

Many Credits are reduced to 50% or split between the two of you

  • Child Tax Credit
    This gets reduced to 50% for each of you to take on your separate returns.
  • Standard Deduction or Itemized Deduction
    • If either of you claim the standard deduction, then both of you must claim the standard deduction and the same for itemized deductions.  They are split between the two returns. 

If you take the standard deduction which is $24,400 for a married couple, it is split to $12,200 for each of you on your returns. If one of you had no income then you are essentially losing a $12,200 deduction. 

Capital Loss is limited to $1500 vs. $3,000 on a married filing joint return.

5. Deductible IRA and Roth IRA’s

If you file as married filing separately, then you are likely not going to be able to contribute and deduct money in a traditional IRA as your income limit is reduced to $9,999. Roth IRA contributions are also limited to those with income less than $9,999.

Pro Tip: You can implement a retirement plan in your practice or use the one at your work.  You can do this and still get a tax deduction for your retirement contributions or contribute to a Roth option 401(k).  

You can also still take advantage of a Back Door Roth as a way to grow your individual Roth account should you want to invest more than the limit on the 401(k) of $19,500. 

6. Spousal Tax Benefit

This is the ability to use your spouse's tax bracket on the married filing joint return when their income is much lower or they have no income. 

If you and your spouse earn the same income, there would not be a difference in MFJ vs MFS tax filing except for the deduction limits above. But if you or your spouse has no income and files separately, you are losing the ability to use his or her tax bracket.

Let’s assume that your total household income is $250,000 and you are just taking the standard deduction. Not counting any other deductions, take a look at how the spousal tax benefit works when looking at your federal taxes. 

Example 1: You both earn $125,000 each totaling $250,000.

Total Taxes
MFJ $42,494

You - MFS ($125,000)

Spouse - MFS ($125,000) $21,247
Total- MFS$42,494
MFJ Tax Difference = $0


Example 2: You make $250,000 and your spouse stays at home.  

Total Taxes

You - MFS ($250,000)

Spouse - MFS ($0)$0
Total- MFS$58,424
MFJ Tax Difference = $15,931

Example 3: You both work but you are the breadwinner earning $200,000 and your spouse earns $50,000.

Total Taxes

You - MFS ($200,000)

Spouse - MFS ($50,000)$4,345
Total- MFS$45,758
MFJ Tax Difference = $3,265

NOTE: In a community property state both income and assets are assumed to be owned by both of you. So you can actually file separately and the income would be split on both of your returns essentially the Spousal Tax Bracket not hurting you other than the loss of the MFS deduction issues.

Community Property States are:

  • Arizona
  • California
  • Louisiana
  • Idaho
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

In Summary

There are many tax benefits to filing your taxes jointly.  By making the decision to file your tax separately you may end up with higher taxes but lower student loan payments.  Putting together a plan is the best way to make sure your strategy is the right strategy. Contact us today to get started on your student loan tax plan.