SAVE Student Loan Plan Allows Loophole For Married Couples, But Watch Out For Taxes

The new SAVE repayment plan for federal student loans has a lot of built-in features that make it attractive for people with student debt. Not only does this plan let borrowers pay 5% of their “discretionary income” toward undergraduate student loans instead of the 10% required for other income-driven plans (starting next year), but current statistics show over half of borrowers already enrolled in SAVE are paying $0 monthly.

Further, unpaid interest on loan balances is covered by taxpayers when borrowers pay $0 per month toward their loans or less than their accrued interest each month.

And just like other income-driven repayment plans, remaining balances left on the SAVE plan are ultimately forgiven after 20 to 25 years.

Married Couples Could Potentially Get A Lower Monthly Payment By Filing Taxes Separately

There’s another tax-focused benefit of the SAVE repayment plan that hardly anyone talks about. Essentially, married couples where only one spouse has student loans and the other doesn’t may want to file taxes as “married filing separately” and not list the other person’s income in their application.

Here’s how the U.S. Department of Education describes this benefit on its website:

“The SAVE Plan aligns the inclusion of spousal income with other existing IDR plans. Borrowers who file their federal tax return as married filing separate will only include the income of the borrower when determining their monthly payment.”

When would this make sense? Imagine a woman with $0 in student loans earning $250,000 per year wants to marry someone with $150,000 in student debt and a public service job that pays $40,000 per year.

Instead of having to list both partner’s incomes on the SAVE application, this couple could file taxes married filing separately and have the spouse with the low income and all the student loan debt qualify for the lowest possible monthly payment. At that point, they could pay whatever the SAVE plan requires (5% of their “discretionary income” for undergraduate loans starting in 2024) during their public service career regardless of how much their spouse earned, and they would still have remaining balances forgiven after 20 to 25 years.

Of course, this loophole has been around for a while and also applies to other income-driven plans like Income Based Repayment (IBR) and Pay As You Earn Repayment (PAYE). Filing taxes separately didn’t help lower payments on the Revised Pay As You Earn Repayment Plan (REPAYE), yet individuals on this plan will be automatically moved to the SAVE plan since it’s technically just an update to the REPAYE program.

When The Math Doesn’t Work Out

Unfortunately, there are consequences that come with submitting tax returns with the married filing separately designation, and not everyone runs the numbers to know which strategy would actually save them money in the long run. Many of the consequences of filing married filing separately can also come into play later on in a couple’s marriage as well, which may be long after they make the plan to file separately in order to qualify for a low monthly payment on the SAVE plan and ultimate loan forgiveness.

The exact situations where couples who file taxes separately could end up paying significantly more in taxes than they get in student loan savings vary dramatically and always depend on unique personal circumstances. However, there are more than enough scenarios that could come into play to give you an idea.

Tax advisor and enrolled agent Edward Nisanov of Nisanov Tax Group says that couples who file married filing separately can be overpaying in taxes if they have student loan debt, child care expenses and/or educational costs during the year. Ultimately, this is based on the fact that deductions that apply in these situations are disallowed for married taxpayers who file using this status.

Nisanov offers the following example of how this could work:

Imagine a couple who earns a combined income of $100,000 and has one minor dependent child in daycare and one college student. In the meantime, one parent also has student loan debt from their college days. Assuming they could maximize all of these credits, Nisanov says this couple could be giving up approximately $3,500 in tax savings by filing separately in each year the credits apply.

Financial planner and enrolled agent Frank Remund of Savvy Advisors adds that married couples who file separately could also miss out on the child tax credit based on their income. The child tax credit phases out at incomes over $400,000 for married couples filing jointly and $200,000 for all other filers, he says, so someone who files separately with a high income could miss out on this credit.

Remund also adds that today’s high interest rates on home loans mean more first-time homebuyers may be able to qualify for itemization when they file their tax return next year and in the coming years, especially in areas where home values are high.

If one spouse itemizes and qualifies for $30,000 in deductions based on home interest ($25,000 interest plus $5,000 in SALT deductions) and the other spouse has just $5,000 in deductions from SALT, you have a total of $35,000 in deductions but the $5,000 deduction is used on the lower earning spouse so it doesn’t get as much “bang for the buck,” he said.

California CPA Alec Kellzi also adds that filing separately impacts how spouses offset capital gains and losses from their investments. If one spouse has capital losses but the other has capital gains, filing jointly permits them to use the losses to offset the gains, reducing their overall capital gains tax liability, he said.

However, the same cannot be said for married spouses filing separately. In fact, Kelzi says the ability to offset capital gains with capital losses becomes limited, leading to higher capital gains taxes and overall tax costs.

The Bottom Line

The examples above are just some of the ways filing taxes separately as a married couple can lead to higher tax bills over time, but these are really just the tip of the iceberg. Whether you’ll pay more in taxes by filing separately and how much more you’ll pay depends on a range of unique factors and life circumstances only you can know.

Ultimately, this is why you’ll probably want to speak with a tax professional before you file taxes separately as a married couple to get a lower student loan payment through the new SAVE income-driven plan.

An accountant or tax professional can answer your questions and figure out which scenarios to run so you can know which tax filing status will save you the most money over time.

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