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  • Married filing jointly or separately

    My wife and I are both residents, with only W2 income. Last tax year, she was in her 4th year of school, so with only my resident income (for half the year) we got a large return. This year her tax situation is the same as mine was last year, but I obviously have a full year of income (household total around 70K for the half of 2016 she had an income and my year of earnings). I plugged our tax numbers into TurboTax (married filing jointly) and it looks like we'll owe taxes this year.

    My question is this; would it be advantageous for us to file separately, given that her tax situation (being the same as mine last year) should land her a nice return and may at least cancel out any taxes that I would owe. Bear in mind our W4's are unchanged from 2015 or 2016. Am I thinking about this correctly, or is there something about the tax code I don't quite understand? If it's important, we both have student loans in RePAYE.

  • #2
    The return in 2015 was likely from them withholding too much (interest free loan to them), whereas your 2016 amount owed corresponds to what should have been withheld.  Look at total tax, not what you're getting back or owe.  If you file separately you'll both see higher relative tax brackets.  Wouldn't suggest filing separately.

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    • #3
      You are thinking about this incorrectly.  How much you owe or get back in 2017 should have no impact on how you file taxes.  Your goal is to minimize the total tax due (form 1040 line 44).  You need to adjust your withholdings/W4s to minimize what you owe or get back every April 15.  Most people don't want to give Uncle Sam a tax free loan (i.e. have a big tax refund), but you also don't want to have too little withheld and pay a penalty for not withholding enough. It annoys me that most people I talk to are happy to get a tax refund and are mad about having to pay additional income tax every April 15.  Very rarely are there situations where MFJ works out because you lose deductions and typically gain nothing from the tax code (for those of us on IBR, eg).  Since you're on RePAYE, it doesn't matter if you file jointly or separately for loan repayment, so file in the way that minimizes line 44.  From what you've told us so far, I'm guessing MFJ is likely better because you do keep the deduction for student loan interest but lose it with MFS.

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      • #4
        "Very rarely are there situations where MFJ works out because you lose deductions and typically gain nothing from the tax code (for those of us on IBR, eg)."

        You meant MFS, right?

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        • #5
          Correct, my mistake.

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          • #6
            The only time MFS might benefit from tax alone is when you have low but disparate incomes when one would have an income-related tax deduction, for instance medical bills (only deductible over 10% of AGI). If the incomes are too high, though, they are exposed more to the higher brackets resulting in a higher tax bill. In addition to the higher bracket exposure, there are more downsides to MFS like being ineligible for several credits and deductions, and being unable to make direct Roth IRA contributions (can still backdoor).

            Another possible situation is with student loan payments *if* you don't plan on paying the loan off, e.g. PSLF or another untaxed forgiveness plan. The MFS-PAYE-PSLF stack, in the right situation, can save tens of thousands of dollars, but has to be applied correctly. The reduced loan payments may save you more than you would lose to income tax over the year, and then once you no longer have a partial hardship (calc'd pmt > 10-yr std amt), switch to MFJ and get the tax benefit. If you do end up on the hook for your student loans eventually, like most of us do, then anything you don't pay is still accruing, and you're only getting a temporary cash flow benefit which is likely not worth it.

            I MFS'd for 3 years, one for medical bills and two for the MFS-PAYE-PSLF stack. Once my wife's income was high enough no longer to have a PFH, we switched to MFJ. Spent an add'l $2K on taxes over that time (big break from the medical bills) and saved probably $10K on loan payments on a loan that's being forgiven anyway. Be aware that if she weren't doing forgiveness, I'd still be on the hook and basically would have just paid extra taxes while letting interest accrue. If you need lower payments just for cash flow alone, there are bigger problems afoot.

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