Using a student loan repayment calculator, determine the required payments when filing jointly versus separately

Table 4 shows the net savings or cost when one spouse has $90,000 of student debt, the average debt level for a graduate student. The total income level begins at $80,000 because at income levels below $80,000, there is a net benefit of MFS regardless of the percentage of income earned by the spouse with the student loan (assuming that the spouse without the loan earns at least $10,000). As the income of the spouse with the loans represents a larger percentage of the joint income, the net benefit of MFS decreases and ultimately results in a net cost.

The net benefit decreases as the income of the spouse with the loan increases because (1) the loan payment savings decline and (2) the tax cost of MFS increases. The tax cost increases as the spouses’ income levels become more disparate. As the difference in the two incomes increases, the couple lose the benefit of the 12% tax bracket on a portion of their taxable income. This adds to the tax cost of losing the student loan interest deduction.

This article focuses on a couple who chose an income – driven repayment plan and want to keep their student loan payments as low as possible

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As the number of college graduates with large amounts of student loan debt increases, clients will expect their tax advisers to determine whether the reduction in loan repayment amounts under income – driven repayment plans is worth the tax cost of MFS. The following approach outlines the steps an adviser should consider in advising clients.

The Federal Student Aid Loan Simulator is located at loan – simulator . This is the loan simulator used for the examples in this article, and it easily allows a change in the facts from MFJ to MFS.

Most tax preparation packages provide an option comparing the tax liability for a married couple filing jointly versus filing separately.

In addition to determining whether there is a net benefit from MFS, the tax adviser should remind the couple of the long – term consequences of choosing an income – driven repayment planpared to the 10 – year standard repayment plan, individuals will pay more interest under the 20 – or 25 – year income – driven repayment plans. The yearly earnings and loan balances of borrowers determine whether they will repay their loans in full. If the borrower has a remaining balance at the 20 – or 25 – year forgiveness point, the loan forgiveness is taxable under current law.

However, when an individual files MFS, the child care credit is not allowed, so the dependent care flexible spending contribution reduces AGI and provides a tax benefit at the individual’s marginal tax rate

The income – driven plans determine the loan payment based on AGI. Lowering the AGI of the spouse with student loans or lowering the income of the higher – earning spouse if both spouses have loans can reduce the required student loan payment. Tax planning options for reducing AGI include contributing to a 401(k) plan, a traditional IRA, or a health savings account. Couples should also take advantage of pretax fringe benefits, including pretax health insurance benefits and transportation benefits.

Couples with children should consider using their employer’s dependent care flexible spending program (limited to $2,500 for those couples filing ount contributed to the dependent care flexible spending program reduces taxable wages and lowers AGI. When a couple file jointly, the dependent care flexible spending contribution reduces the child care expenses eligible for the child care credit. If the couple’s marginal tax rate is less than 20% (the child care credit percentage), then the couple are better off taking the credit.