Anyone file married filing separately for IBR?

[jhwkr542]

Background:  Wife and I both have student loans ($200k each).  She's been out of residency for 1.5 years.  I just finished fellowship last June.  I have refinanced my loans and will start paying aggressively on mine.  They should be gone in 3-4 years.  Wife qualifies for PSLF and is around 6 years away after doing IBR for the last 4 years.  Both W-2 employees currently with partnership for me in 2.5 years.  Wife is peds, so last year in 6 mos of fellowship + 6 mos attending salary, my gross income was more than hers due to pay differences and her access to both 403b/457b.  I'll run the numbers but a rough estimate suggests that IBR payments would be significantly smaller ($1000+/mo) if we file taxes separately because the IBR payments wouldn't also account for my salary.

Question:  Has anyone else done this or know of people who have filed taxes married filing separately just to lower their IBR payments?

I don't have all of our tax documents yet to know the tax difference, but I doubt we'd pay more than the annual difference in IBR payments.  Obviously, there are the future unknowns with PSLF (capping it and whatnot), but I'm hedging that a little bit since we'll pay down my loans first.

[Peds]

i believe the general rule of thumb is MFS rarely benefits a couple. there is a very old thread on Bogleheads that went over it based on memory.

[DMFA]

We did it. Kept our payments around $200. Quit doing it this year because our separate incomes are too high to get any benefit. Taxes weren't as favorable, prob to the tune of $2,000 or so.

Keep in mind this creates a lot of unpaid interest, so I'd only recommend doing this if you're in training and can't make the payment anyway, or if you're committing to PSLF or another forgiveness plan and don't plan on paying your loans anyway.

[canadianoutlaw]

We have done MFS for the last 4 years to lower my wife's monthly IBR. She is pursuing PSLF. We are both residents and this approach has worked well for us. i do not think this is an unusual tactic for people committed to PSLF

[DMFA]

Peds wrote:

i believe the general rule of thumb is MFS rarely benefits a couple. there is a very old thread on Bogleheads that went over it based on memory.

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Define "benefits."  As far as to *only* what the tax bill may be, you're right in that it would rarely benefit *most* couples.  However, MFS can be very beneficial to the *overall* picture if one spouse has a disproportionate amount of debt for their income, particularly vis-a-vis income-driven student loan repayment plans, or even on the taxes themselves in other situations such as medical bills (if >10% of income).

This actually double-benefited us one year when I was caught uninsured for a major surgery (the 4 weeks in my whole life when I didn't have insurance, ffs...) and she started owing her med school debt on an intern's half-year income.  The deduction I could take from using only my income resulted in a lower tax bill than if we had the lower withholding rate of MFJ.

MFS prevents you from:

• deducting TIRA contributions or making direct Roth contributions (can still back-door afaik)


• deducting student loan interest


• taking child/dependent care credit


• a few others I can't think of from the top of my head

Of note, if you're in RePAYE as your form of IDR, then your spouse's income (and debt) are calculated into the payment, and there's no longer a benefit to doing MFS.

Basically, if there is an instance when one of you has a payment or deduction which is contingent on income, and if that benefit is greater than the increased amount of taxes you'd end up owing (beyond the simple arithmetic), then you should *consider* MFS.  If you hinge very highly on student loan payments, especially if you have disparate debts and incomes, you will *probably* benefit from MFS.  You should run the numbers both ways and be mindful of the effects the joint income would have on your other finances beyond just taxes.

And, another thread in the tapestry, if you would end up owing more because of AMT by MFJ and wouldn't by MFS, then MFS might benefit you from a tax standpoint alone.

[canadianoutlaw]

DMFA wrote:

making direct Roth contributions (can still back-door afaik)

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this is correct, you can still back door into a Roth even if MFS.

[RandomDoc]

My wife and I file MFS to keep her IBR payments lower.  She is in peds as well and is going for PSLF.  I run the numbers each year with turbotax looking at MFJ and MFS and so far the decreased loan payment has outweighed the tax benefits of MFJ.  Now if PSLF goes under this will be a double whammy. she has 6-7 years left before PSLF.

[remapthesoul]

I have been doing MFS for taxes for the past couple years and will likely do it again this tax year. Annually, I've been asking my CPA to calculate my wife and my taxes based on MFS vs. MFJ status and each year the tax savings have not outweighed the savings in monthly IBR payments. I am working towards PSLF and have about 4.5 years left, so this has suited me well. As mentioned above, there are certain deductions you can't claim, so that should be kept in mind. But as canadianoutlaw wrote, you can still do a Backdoor Roth IRA.

[Dilaudidopenia]

We do MFS as well.  We are graduating residency this year.  Wife is Peds just starting a 3 year fellowship in July (holding out for PSLF).  I am going into community EM practice.  Just made our third backdoor Roth contribution.  When I'm honest with myself however, I just can't see PSLF shaking out.  We will submit her application for refinance thee second they scrap/cap the program.

[nachos31]

jhwkr542 wrote:

Question:  Has anyone else done this or know of people who have filed taxes married filing separately just to lower their IBR payments?

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See above and +1. My wife and I both have loans (mine on IBR, hers on PAYE). As others have pointed out, you just have to run the numbers to figure out if MFS + lower IBR/PAYE payments > MFJ + higher payments.

Peds wrote:

i believe the general rule of thumb is MFS rarely benefits a couple. there is a very old thread on Bogleheads that went over it based on memory.

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Not true. You just have to run the numbers. For example, for 2015 taxes (filed as residents) MFS saved us net ~$1800.

For 2016 taxes (will be filing having spent 1/2 year as residents, 1/2 year as attendings) I'm not so sure yet. Numbers may work out in favor of MFS again but by a slimmer margin. I anticipate for 2017 taxes that it'll be a wash or in favor of MFJ.

You can definitely do backdoor Roths as MFS. The student loan interest deduction is a bummer to miss as MFS. However, even if we filed 2016 taxes as MFJ we would be phased out of the deduction due to the income limitations. So it's basically a wash for us at this point.

[Sergio Estavillo]

nachos31 wrote:

My wife and I both have loans (mine on IBR, hers on PAYE).

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Both of you might be better served selecting REPAYE to mitigate interest accrual and lower your monthly payment.  Also, likely file joint which will probably lower your tax liability vs MFS.

[jhwkr542]

Thanks for all the replies! I'm glad to see it's not a crazy idea. I'll have our CPA crunch the numbers both ways. Most of those deductions we're phased out of based on income, so I'm not worried about those.

[nachos31]

Sergio Estavillo wrote:

Both of you might be better served selecting REPAYE to mitigate interest accrual and lower your monthly payment.  Also, likely file joint which will probably lower your tax liability vs MFS.

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With attending level salaries? I was under the impression that there is no income cap for REPAYE therefore it is not ideal when making attending level salaries--any potential interest savings is dwarfed by the huge non-capped monthly payment? From what I've read here on WCI, some recommend REPAYE during residency and then switching out to PAYE/IBR after residency. Am I missing something?

[Sergio Estavillo]

nachos31 wrote:

Sergio Estavillo wrote:

Both of you might be better served selecting REPAYE to mitigate interest accrual and lower your monthly payment.  Also, likely file joint which will probably lower your tax liability vs MFS.

Click to expand…

With attending level salaries? I was under the impression that there is no income cap for REPAYE therefore it is not ideal when making attending level salaries–any potential interest savings is dwarfed by the huge non-capped monthly payment? From what I’ve read here on WCI, some recommend REPAYE during residency and then switching out to PAYE/IBR after residency. Am I missing something?

Click to expand...

I missed that you're now an attending.  If your AGI is sufficiently high to exceed the 10-year standard payment cap (which means your AGI should be approximately 1.4x your student loan balance with REPAYE), then you're probably a good candidate to refi if you're not pursuing PSLF.

[jhwkr542]

Sergio Estavillo wrote:

nachos31 wrote:

Sergio Estavillo wrote:

Both of you might be better served selecting REPAYE to mitigate interest accrual and lower your monthly payment.  Also, likely file joint which will probably lower your tax liability vs MFS.

Click to expand…

With attending level salaries? I was under the impression that there is no income cap for REPAYE therefore it is not ideal when making attending level salaries–any potential interest savings is dwarfed by the huge non-capped monthly payment? From what I’ve read here on WCI, some recommend REPAYE during residency and then switching out to PAYE/IBR after residency. Am I missing something?

Click to expand…

I missed that you’re now an attending.  If your AGI is sufficiently high to exceed the 10-year standard payment cap (which means your AGI should be approximately 1.4x your student loan balance with REPAYE), then you’re probably a good candidate to refi if you’re not pursuing PSLF.

Click to expand...

Wife and I are both attendings now.  I have refinanced my loans.  Wife is pursuing PSLF.  I'm essentially trying to minimize our payments for PSLF, and if I can do that by MFS, then we may (probably?) come out ahead by doing MFS just to lower the PSLF payments based on her annual gross (part time urgent care peds maxing out 403b and 457b).  Since the tax breaks lost for MFS are already lost at our income levels, I think we will, but I don't have all of our tax forms yet to have our CPA calculate it.  Sort of an informal poll.