I recently got married (Oct 2012) and we submitted our IBR documentation for my wife’s student loans (extremely extremely high loan amt) to the loan processor a couple weeks back. Her repayment starts in the next month. We used the Alternative Income Documentation for this year as we haven’t filed our taxes yet and she worked only for a couple months last year. We live in a Community property state and are also planning to file Married-Separate due to the AGI situation.  However, my question is as follows:

a) It appears that our loan processor has already approved IBR for this year (2013 pmts) using her AGI only, can we file Married-Jointly for 2012 tax year?
b) And then can we do Married-Separate next year (2013 taxes)?  Will this raise a red flag with the loan processor?

While IBR is a great option, it creates more tax disadvantage for married-jointly. Your help is greatly appreciated.

AR

If you don’t want your joint incomes to be included in the IBR calculation next year (2014), I would be careful about filing a joint return for 2012. When they send you another Alternative Documentation of Income request (in 2013), they will ask you for your “last filed return.” It’s a year behind.

They presumably looked at your wife’s 2011 return (when she filed as a single taxpayer) to determine the IBR amount for 2013. Next year, they will look at your wife’s 2012 return. If you file jointly for 2012, they will consider your joint incomes when determining the IBR repayment amount for 2014.

For example, I received a request for Alternative Doc of Income at the end of 2012. They wanted it within 45 days or else they would jack up the repayment amount to the maximum amount. Most people can’t do their taxes until after February (when they get W-2s). Thus, I had to submit my “last filed return,” which was for 2011.

The 2011 tax return will determine my monthly payments for the rest of 2013. When they send me the Alternative Doc of Income form at the end of 2013, I will have to submit my 2012 tax return. They’ll look at the 2012 return to determine payments for 2014. Again they are a year behind, at least in my case.

But be careful not to get caught in this trap. It will be impossible to reverse. Note: I have been filing married filing separately for the past three years to avoid the joint income problem…. so I’ve been down this road. 

Joe is right on.  And yes AR, many folks pay more in tax when filing separately, but for some of us it’s worth it to pay less in student loans.

Thanks all for the response.  I don’t want to mess with IRS as this IBR is already a pain in the butt.

This is somewhat controversial but I have already explained this to my wife and she is okay if it makes sense:  Since I know we will be under IBR for as long as possible (hopefully 25 years or if my wife does PSLF), what are the tax benefits of filing Single vs Married-Separate.  Yes..this does mean that we could get an annulment from the state of CA.  While not a good thing, we would just keep this between us and no one will ever know.

Pros vs. Cons (besides emotional)?

Joe, I’m slightly confused about this. You said it is impossible to reverse? At present, I have indicated that we are MFS on the alternative documentation form. But it looks like MFJ might actually be more advantageous for this and the next year. When our incomes go up, we may want to change back to MFS. Is this not possible?

> what are the tax benefits of filing Single vs Married-Separate.  Yes..this does mean that we could get an annulment from the state of CA. 

I will admit that I have also done the calculations for whether IBR is telling me that I should “divorce” my wife.  Depending on the exact numbers, it can be beneficial for the couple to divorce so that the lower earning person (who also presumably has the much larger student loans) can qualify for reduced payments under IBR.  The tax payments will be slightly increased relative to Married-Filing-Jointly, but two singles will usually be less than Married-Filing-Separately.

Yes folks, IBR is encouraging you to get divorced.

Yes folks, IBR is encouraging you to get divorced.

This is exactly the situation I am in, although I am not yet married… but IBR has my fiancee and I making marriage a not very appealing option since I make considerably more money than her and have no debt, while she has 6 figure student loan debt that she cannot pay back without help from IBR.

I make decent money but if we had to pay the standard loan payment we would be knocked down to lower middle class from upper middle class with 4 digit monthly loan payments… it makes no sense.  If student loans belong to the borrower, and aren’t transferable even through marriage, then the IBr should be solely based on that persons income imo, marriage should have nothing to do with it…

I did some research into IBR and filing separately can help in certain cases. For community property states like CA and NV, usually both spouses split income equally for regular work income and the taxes come out similar unless you have large deductions in the categories that are lost for filing separately. In non-community property states it will likely result in additional taxes unless both spouses make about the same amount.

When filing separately, both spouses get to take the household size 2 deduction which is about $23,000 - so the “exempted income” doubles to $46,000 and the amount that 10-15% is applied to is lower. As one example a $550 joint payment recalculated into $200 per person resulting in overall savings.

Stafford and GradPlus loans both are eligible for IBR. GradPlus basically addresses the problems with predatory private loans while allowing an unlimited borrowing limit for medical school or high cost private schools. Parent Plus is probably the worst one to have - no IBR but also unlike other private loans no statute of limitations.

It’s quite a drag though because most servicers are just plain dumb. What if one spouse returns to school ? It’s harder to “unjoin” the loan payments if filing jointly and there is some situation change. By the way - make sure they use your proper AGI to calculate. Anyone living abroad and paying taxes will exempt something like 90k+ per person so a normal person should not have any IBR payments if not living in the USA for over a year. Also sometimes the services just screws it up and uses something other than AGI to calculate but it’s part of the IBR bill.

My wife and I are considering the “on paper divorce” for the reasons mentioned in this post.  It does seem that IBR encourages this.  We are both in our 50’s and the student loan burden is mine - and it is significant.  We live in Colorado, so not a community property state.  It (divorce) may be the only option to preserve some kind of standard of living later on.  Has anyone gone through this?  What suggestions do you have?  Thanks.

Excellent questions and replies!  Had a related question. If my wife enters into one of these income based plans and use married filing jointly in the beginning, can we switch to married filing separate in the next year?

I filed an extension last april so I haven’t filed taxes yet, they are due October 16. My AGI last year was around $90k and my wife made essentially 0, but she has $125k+ in debt that we have put into forebearance until she finds a job. We have 3 kids so we are family of 5.

This year, my wife and I could really use the tax refund ($13k if we file jointly), according to the repayment estimator under IBR we would pay $585 a month. If we filed separately she would pay $0 on her loans but we would lose most of the refund.

My current year income is considerably higher than last year so my AGI I imagine will be much higher too. In this case, it would make a lot more sense for us to file separately since my wife’s income will still be pretty low (i don’t know if it will be $0 but it may be close).

So my question is should we forgo the big refund this year and file separately so we don’t raise any flags during the income certification next year when we file separately again? Or can we file jointly this year, pay the $585 a month and get the $13k refund, and then file separately next year when my wife’s low income qualifies her for a likely payment of $0?

Thank you so much for your consideration!

Hi, Glad to be here and pleased with your topics and discussion on changing married filing status yearly, I must say your observation is too good and work hard behind this. Let’s talk on internship just come across this resource and looks good http://www.crunchytricks.com/2018/08/guidelines-for-internship.html I don’t know you will get this worth reading or not but I found helpful to much.

Hello I’m currently happily married, but would like to find out if that does change in the future. How would that effect the my loan forgiveness on my student loans. Could someone please reach out to me at 703-627-0584 ,
Thank you