Repayment will resume this year: Is your tax filing strategy in place?
Yep, it’s tax season already, but It’s been nearly three years since your tax filing status has had any impact on your student loans due to the CARES Act payment pause that commenced in March 2020.
All signs point to borrowers going back into repayment in 2023, sometime between May and September, and your payments will be based on what you were paying before CARES took effect… unless you take action otherwise.
In this blog, we’re going to discuss the “otherwise”.
When payments resume, if you were using an Income-Driven Repayment (IDR), you won’t be required to recertify income for at least six months, and possibly up to a year. This means your payments in 2023 will be based on your 2018 or 2019 income.
This is a GOOD thing if you’re making more money now… but if not, or you’ve been filing taxes Married Filing Jointly with an income-earning spouse, you might benefit from proactively certifying income before CARES ends, and/or filing your taxes Married and Separately for 2022.
You see, your payments can be reduced in select IDR plans by filing taxes Separately if your spouse is working. While this strategy can increase taxes, it’s often favorable if you’re pursuing PSLF.
When trying to decide if MFS is appropriate, consider the difference in monthly payments versus filing Jointly:
Example: You filed your taxes jointly in 2018 with a household income of $150k, and your payments were around $1000/month. In 2022, your household income was $200k, but you’re making $60k/year now. By filing Separately for 2022 and recertifying in 2023, when payments resume they can be below $300/month.
A good rule of thumb is to evaluate if MFS will deliver savings when your spouse is earning $20k or more, and has little to no federal student debt.
If you’re struggling with this complexity, not to worry: We have a calculator specifically for this purpose.
Community Property States:
(Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin)
There’s an additional consideration if you live in one of the above “Community Property” states.
If you file your taxes Married Filing Separately in one of these states, you may need to alternatively document your income to get the lowest available payment in an Income-Driven Repayment plan.
In a Community Property state, when you file Separately from your spouse, 50% of your household income will be reported on your tax return, regardless of what portion of your household income you contribute.
Example #1: You’re working in Public Service and pursuing PSLF with a $60k income. Your spouse is in a private sector job earning $120k. Your household income is $180k.
In a Community Property state, your Separate tax filing will show $90k of income (half the total), which will require a higher payment than one based on your individual salary.
As a result, you have one additional step to secure a payment based on your individual income. When applying for or recertifying an IDR plan at www.studentaid.gov, after linking your tax returns from the IRS site, say “Yes” when asked if your income has decreased. From there, follow the steps to submit a payroll stub showing your individual income; this is called “alternative documentation of income.” Only then will payments be based on your individual income, versus the higher amount resulting from Community Property rules.
Example #2: Alternatively, let’s say you’re earning $80k and your spouse is earning $40k, so your household income is $120k. Your Separate tax filing will show just $60k (half the total). In these cases, where your income is greater than half of the household, go ahead and use your Separate return to lock in the lowest available payment.
Summary: If you’re pursuing PSLF and earning LESS THAN HALF of your household income in a Community Property state, file MFS to drive student loan savings and use a payroll stub versus the IRS upload to set your payments.
When you register for a PSLF Assessment from BenElevate, you get a detailed analysis of your PSLF savings opportunity, action items, and you’ll be able to digitally sign your PSLF Forms. Married borrowers also receive a summary based on filing MFS as well as MFJ, and a recommendation on which will deliver more student loan savings.
*BenElevate does not provide tax advice nor are we able to assume what your tax liability is based on your profile. We provide strategies for navigating your student loan repayment options. We recommend you consult a tax professional to determine your tax liability depending on now you file.