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IBR and Community Property States.

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Total Posts: 3

Joined 2013-01-23

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Hi Heather!

My husband and I got married in 2012, and now we’re trying to figure out how to file our taxes to keep my IBR payment as low as possible. Here’s the nuts and bolts:

I’m currently on the IBR program. I make significantly less than my husband. We live in Washington, a community property state.

If we file as married filing separately (since it is a community property state), my income will look higher than it actually is. At that point, it seems that I would use the alternative documentation of income form to prove my income was lower than what was reported as my AGI on the tax return.

It would benefit my husband if we filed jointly because he contributes to a Roth IRA, and the upper limit for AGI when filing as Married Filing Separately is very low. He would like to avoid recharacterizing his Roth IRA to a traditional IRA if at all possible.

If we filed jointly, it seems that my AGI would be the same as if we filed separately, since things are divided evenly between spouses in community property states. Is my understanding correct that if we filed jointly, both our AGIs would be taken into account? Whereas, if we filed separately, only my AGI would be taken into account?

I think I am confused because whether we file jointly or separately, my AGI is the same, due to community property laws (if I understand them correctly). In either case, my AGI is not accurately reported, and it seems I would have to use the alternative documentation of income form to prove my income in either scenario.

Is the alternative documentation of income form like a substitute for the tax return? If I have to use it either way, it makes sense to me to file married filing jointly to make sure my husband gets the benefits of filing jointly. However, I would like to avoid an IBR payment ballooning to hundreds of dollars per month!

This whole situation is clear as mud to me :) Our priority is to keep my loan payments as small as possible.

Thank you for your help!!

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Total Posts: 604

Joined 2011-03-30

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The ONLY way to separate your income from your spouse’s income for IBR is to file a separate federal tax return.  If you file jointly, your payment will be based on joint income.

If you file separately, because you live in a community property state, you may submit alternative documentation to demonstrate what your income would have been in you had not been in a community property state.  This is 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.

Rank

Total Posts: 3

Joined 2013-01-23

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Great! Thank you very much for clearing that up! We really appreciate your insight smile

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Total Posts: 3

Joined 2016-02-22

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Hi Heather,

I don’t know if I should post this as a new thread or reply on this one, because my question is very much related to the topic of how living in a community property state affects IBR for my wife’s student loan payment.

Am I correctly understanding that you are saying that if I file MFS, then my income is absolutely NOT considered when making the IBR calculation?  Because it specifically seems to ask for my income, and I am wondering why they need to know *my* income if not to increase how much my wife has to pay.

Question 11 states: “Provide documentation of your spouse’s income, as described below.” (https://www.acs-education.com/CS/media/documents/IBR_Application_c.pdf)  and then it goes on to say: “You must provide documentation of all taxable income that you and your spouse (if applicable) currently receive.”

Rank

Total Posts: 3

Joined 2016-02-22

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Also, to reply to what you said here:

“If you file separately, because you live in a community property state, you may submit alternative documentation to demonstrate what your income would have been in you had not been in a community property state”

I don’t understand, why would my wife’s income be any different whether you were in a community property state or not, especially if she has no income?

Rank

Total Posts: 3

Joined 2016-02-22

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Ok never mind my last post.  After running the calculator on studentloans.gov it appears filing separately *would* reduce my wife’s payment to zero.

Unfortunately, filing separately would mean I would unexpectedly owe over $5000 plus penalties and interest, which even assuming I would be able to repay over a year, plus the extra I would have to withhold would mean I would be down an extra $800+ per month to save the $500+ per month that I can’t afford to pay now.  At least a few years down the road when the monthly gets high enough (this is graduated payment) it will still eventually be cheaper to go this route, if my house holds together that since it’s either maintaining my house or paying my wife’s student loan!

Total Posts: 1

Joined 2018-02-21

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Hi, Heather! Thanks for this information. Would this apply to Direct loans as well? My husband and I are in a similar situation in Texas, but his loans are not FFEL.

Total Posts: 1

Joined 2018-05-08

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