Income-Driven Repayment Options for Gay or Lesbian Couples (Post DOMA)
On Wednesday, June 26, 2013, the U.S. Supreme Court cleared the way for the federal government to recognize marriages between same-sex couples. Equal protection for my gay and lesbian brothers and sisters!
What does the DOMA decision mean for gay and lesbian student loan borrowers?
Same-sex married couples with student loans will find that having one’s marriage recognized by the federal government makes for some mighty tricky tax decisions.
The income-driven repayment plans (like Income-Based Repayment and Pay-As-You-Earn) limit a borrower's student loan payments to an affordable level based on income. Monthly payments are determined based on Adjusted Gross Income (AGI) and family size.
Under the so-called Defense of Marriage Act (DOMA), married same-sex couples were required to file their federal tax returns as if they were not married.
Federal recognition of same-sex marriage will cause some gay or lesbian couples to pay higher taxes because married couples who earn comparable amounts typically pay more tax than if they were treated as unmarried individual taxpayers. But some married couples, particularly those with children and only one working parent, will pay less tax by filing their taxes jointly as “married”.
Couples recognized as married by the federal government have the option to file joint or separate federal tax returns. Married couples who file jointly have access to certain credits and deductions, like the Earned Income Tax Credit, and the student loans interest deduction, which they would not get if they filed “married filing separately”. The DOMA decision means that gay and lesbian married couples have a newly recognized right to choose to file their federal tax return with the “married filing jointly” status, but if one of both of the spouses has student loans, they need to consider the benefits of filing separately. A married person who wants to have his or her monthly student loan payment calculated solely on the basis of his or her own income and student loan debt must file a separate federal income tax return. Most (but not all) married couples will pay more combined tax on separate returns than they would on a joint return. Still, married student loan borrowers should consider whether it makes sense to choose a tax filing status of “Married Filing Separately”. Otherwise, joint AGI will be considered in calculating the monthly student loan payment.
Some of the disadvantages to a “married filing separately” tax status include:
- Your tax rate generally will be higher than it would be on a joint return.
- You cannot take the credit for child and dependent care expenses in most cases, and the amount that you can exclude from income under an employer's dependent care assistance program is limited.
- You cannot take the earned income credit.
- You cannot take the exclusion or credit for adoption expenses in most cases.
- You cannot take the education credits, including the deduction for student loan interest.
- Deductions for contributions to a traditional IRA are reduced or eliminated if your income is more than a certain amount, and this amount is much lower for married individuals who file separately.
This presents same-sex married student loan borrowers with the same complicated tax decisions that opposite-sex married student loan borrowers face:
- file taxes jointly and have monthly payments based on joint AGI and combined student debt, or
- file taxes separately and have monthly payments based on individual AGI and individual student debt
Same-Sex Spouses Now Count towards “Family Size” Without Consideration of Financial Support
According to federal regulations, family size is determined by counting the student loan borrower, his or her spouse, and children if the children receive more than half their support from the borrower. Family size also includes other individuals if they (1) live with you and (2) receive more than half their support from you and will continue to receive this support for the year the borrower certifies family size.
Before the DOMA case recognized same-sex marriages, same-sex spouses were only counted towards family size as “other individuals” who both lived with the borrower and received more than half their support from the borrower. Post-DOMA, same-sex married couples may count their spouses as part of their family size even if the spouse does not receive more than half their financial support from the student loan borrower.
And although AGI is driven by a borrower's federal tax return, family size is not. This means that married couples can count each other in their family size even if they choose to file separate tax returns.
Here is an example of how the post-DOMA tax treatment could play out for a same-sex married couple, where each partner owes student loans:
Rachel and Crystal are married and live in Massachusetts. They do not have any children. Rachel owes $75,000 on her eligible federal student loans and her wife, Crystal, owes $25,000 on hers. They choose “married filing jointly” for their federal tax return and their joint AGI is $75,000. A total payment amount for the couple will be calculated by taking into account both spouses’ debt and both spouses’ income. Under the Income-Based Repayment plan, a family of two with an AGI of $75,000 would pay a total of $654. A proportion of the total payment will be assigned to each spouse based upon her share of the couple’s total student loan debt. In this case, 75 percent of that total is due on Rachel’s loans ($491) and 25 percent of that total is due on Crystal’s loans ($163).
What about same-sex marriage in the community property states?
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), married persons are considered to own their income jointly. At the moment, California and Washington are the only two states that are community property states AND have legalized same-sex marriage.
When a married couple from a community property state files separate tax returns, they generally must report half of their combined income rather than reporting their own earnings alone. In order to have their payment based on separate rather than joint income, student loan borrowers in community property states must file a separate tax return and must also supply “alternative documentation” of their separate income to their loan servicer.
