Borrowing

This smart tax move can save you money if you're married and have student loans

Twenty/20

Filing your taxes jointly can be a great financial perk of married life. Your standard deduction doubles compared to what you got as a single filer, and you get access to many other tax breaks, too.

But if either you or your partner still have student loans to pay off, it may make sense to uncouple your taxes and file as "married filing separately." Under the right circumstances, doing so could save you hundreds of dollars on each of your monthly payments, and thousands over the life of your loans.

"Far more married borrowers need to consider filing separately for taxes than are currently doing so to save money on their student loans," says Travis Hornsby, a chartered financial analyst and founder of financial advisory firm Student Loan Planner. Not doing so is "one of the most common mistakes we come across."

How getting married affects your taxes

When you and your new spouse file jointly, your combined income is taxed at a single unified rate. Depending on the particulars of your tax situation and factors like where you live, how much you earn, and what kinds of tax breaks you qualify for, getting hitched could mean you end up paying less in taxes — or more, in what's often called a marriage penalty.

The marriage penalty generally only kicks in if you would fall into two different tax brackets as individuals. And, after recent tax reforms, the penalty is only substantial for high earners.

In most cases, though, your taxes will be much the same after you marry: "Assuming the couple's joint income is below $600,000 ... the tax outcome should be very comparable to each filing as single," says certified public accountant Robert Westley, a member of the American Institute of Certified Public Accountants' Financial Literacy Commission.

But if one or both of you have student loans, your tax filing status can affect how much you'll be required to pay each month toward that debt.

VIDEO2:3902:39
Paying off your student loans with Michael Torpey

Video by Ian Wolsten

Why getting married could trigger higher loan payments

If you have federal student loans, there are several different kinds of repayment plans available to you, many of which peg your monthly payment to your income. Depending on the plan, those often cap payments at 10% to 15% of your discretionary income.

The problem: If you're filing jointly as a married couple, your spouse's salary and debts factor into the calculations. Your minimum monthly payments could increase substantially — and you may no longer qualify for some income-based repayment plans.

For example, say you have $37,000 in student loan debt and earn $40,000 per year. According to a calculator provided by Hornsby, your monthly payments might be as little as $177 on some income-based plans. Add in a spouse's income, however, and your payment could more than double.

In some of those income-based repayment plans, filing separately means that payments will be based on just the borrower's income, rather than the household income. So you could end up paying less.

How to find the right tax strategy, given your student debt

Talk to a tax professional and a financial advisor to project how your tax filing status will affect your tax bill and your monthly student loan payments — and figure out the best plan to balance those financial obligations, Hornsby says. Look for an advisor who specializes in student loans, which isn't part of the typical curriculum.

Experts say "married filing separately" is the least-favorable filing status, because you'll lose out on certain deductions and credits you'd otherwise be eligible for as a married couple. So it's important to make sure you're not securing a lower student loan payment at the cost of a higher overall tax bill.

It helps to take a long-term-cost view, too. A lower student loan payment under a program that extends your repayment timeline means you're paying more overall as interest builds up. And with an income-driven plan that offers loan forgiveness after 20-25 years, you could owe a substantial tax bill on that unpaid balance.

Far more married borrowers need to consider filing separately for taxes than are currently doing so to save money on their student loans.
Travis Hornsby
Founder of Student Loan Planner

Under the right circumstances, filing separately could save you money by allowing you to keep up with lower payments in an income-based student loan repayment plan, with little or no extra money owed on your tax bill. But it might be better to file jointly to preserve your tax breaks and use other strategies, like refinancing, to keep your student loan payments in check. That's often the better move if both you and your spouse have student loan debt, says Hornsby.

In either scenario, consider putting the money you save on taxes or loan payments toward your student loan balance.

"[A] thousand dollars a year of extra money in your pocket that's going to principal instead of interest is going to get you out of debt faster," says Hornsby.

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