Hi,
My fiance recently graduated from grad school w/ approximately 120K in Federal student loans.  She has a job making approximately 65K a year and has applied for IBR repayment (25 year 15% variety).  I currently don’t have any student loans and also make around 65K per year.

We are planning to get married this Spring but I’m worried about the tax ramifications of doing so.  If we get married and file jointly her IBR payments go way up.  If we get married and file separately we lose a bunch of tax deductions that would come in handy when we start a family.-probably soon!  Also, we live in a WI which is a community property State which means that if we file separately that we have to split our common deductions such as mortgage interest on the home that we share.

I recently thought of another alternative which is Domestic partnership instead of marriage.  This would allow us to file taxes as “Single” which allows us to keep deductions such as Child care tax credit and student loan interest deduction.  Also, the community property rules for dividing deductions don’t apply for domestic partnerships in my state.  If we have kids she can file as “Head of Household” take the mortgage/property tax deduction as long as it comes out of her account, and also claim the dependents on her taxes.  I on the other hand can simply file single and claim the standard deduction.  This would also allow for her IBR payments to be lower because her AGR would be less because of deductions. 

Do you see any caveats with this approach?  I realize that domestic partnership laws can change at any time which would be a risk but I guess I can always dissolve the domestic partnership and apply for a marriage license if things change in the future.  I really don’t like that IBR penalizes you so much for getting married.  Ideally it should allow you to file jointly and calculate your payments off the “average” of your two incomes.-but I guess I don’t make the rules ;)  Thank you for your help!

Neither of us makes the rules, huh?    We’d make much better ones!

There is new information you should consider on the whole community property tax filing thing from regs just issued last month.  I’ll paste the language below my reponse.  Otherwise, you are thinking through the issues just as I would.  The only thing I would add is to encourage you to consider also consider the non-financial implications of your decisions.  Your goal is to find the balance that suits your family best.  Remember too, that you can change your tax filing decisions each year, and need not stick with the same plan if circumstances change.

I’m not familiar with Wisconsin domestic partnership law at all and I’m not a family law lawyer.  That said, your analysis seems well reasoned to me!

From the new regs:

The Department understands that
married borrowers who file their
Federal income tax returns separately
from their spouses and who reside in
community property states may be
disadvantaged when determining IBR
eligibility when compared to similarly
situated married borrowers in noncommunity
property states. However,
§§ 682.215(e)(1)(B) and
685.221(e)(1)(i)(B) and
§ 685.209(a)(5)(i)(B) authorize the use of
alternative documentation of a
borrower’s income if the Secretary or
the FFEL loan holder believes the
borrower’s reported AGI does not
reasonably reflect the borrower’s current
income. Because the Department
believes that it is inequitable to treat
married borrowers who file their
Federal income tax returns separately
differently based on where they reside,
we encourage FFEL loan holders to use
alternative documentation of the
borrower’s income under these
circumstances. The Department will
take the same approach with the loans
it holds.

Heather,
My wife graduated with an advanced degree and a lot of student loan debt (six figures) but is currently an low paid intern ($6000 per year) while she gains the thousands of hours of experience needed to become fully licensed in her profession. We now live in California which is also a community property state and therefore will have to combine our salaries and divide that in half when calculating our individual adjusted gross income(AGI) for taxes. We will have to file married filing separately as our tax status to keep her student loan payment as low as possible (which is already a big a financial hit on our taxes).

Up until reading this post I thought this also means that when calculating the IBR payment (under the old 15% formula) her payment would be based on the community property calculated AGI (half of our combined income). In light of the new Department regs you posted above, does that mean she can file alternative documentation instead of using the community property AGI?

That would mean her IBR payment would be based on her meger $6000 income not half of our combined income which would treat us the same as a married filing separate couple in a non-community property state. If you don’t know the answer to this is there a source you recommend I check with to get a firm answer on the impact of the new regs you posted?

I have some real concerns with filing alternative documentation because my wife has already had problems with her lender calculating her past IBR payments incorrectly (a lot higher then they should have been) and I do not trust that they would accept the alternative documentation.

sflocal75,

You are right that it initially seemed that folks in community property states would have to use 1/2 of the community AGI even when they filed separate federal tax returns.  The new language from the Dept of Ed indicates differently (to be clear, the Dept stated that no rule change was needed and simply said they would “encourage” FFEL loan holders to accept alternative documentation and would itself accept alternative documentation.

You are wise to be wary about the way the loan servicers calculate payments as they are notoriously bad.  I’m not sure using alternative documentation makes it any more or less likely that the process will be screwy, however.

In general, plan to submit all requests IN WRITING, specifically state the AGI you are documenting, monitor the process closely, double check their calculations, etc.

Yours,
Heather

Heather,
thanks so much for the quick response and the good news. This is going to save us hundreds of dollars a month in student loan payments!

I really think there should be a community property state IBR section on the FinAid wedsite that goes into these details and makes these issues very clear to borrowers. Of course I don’t think the lenders want these facts to be clear so folks like my wife overpay them.