Both myself and spouse are residents...MFS vs MFJ and IBR implications

[MMXIII]

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So I am a first year resident and so is my spouse. We are almost done with our grace period. I am thinking about the implications of our tax filing status in regards to the monthly amount that we will owe for our income based repayment.

First off, some context...salaries...we both make ~50,000 a year so 100,000 combined income. Our loan amounts are 175,000 for me and 80,000 for my spouse.

If we do married filing jointly I would owe $658 per month and my spouse would owe $301 per month. A total of $959 per month.

If we do married filing separately I would owe $334 per month and my spouse would owe $334 per month.A total of $668 per month.

It seems glaringly obvious to do married filing separately, right? Am I missing something? If I understood IBR correctly, the government pays off an extra interest accumulated as long as you are making minimum IBR payments.

The amount of interest that will be accumulating per month at our 6.8% rate is 1440 from my calculation of 175k + 80K=(255,000 x 0.068)/12. So that means that even if we were paying the rate of $959 per month with married filing jointly the government would pick up the rest of the piling interest. It makes sense for me to lower that the minimum amount required to pay to maximize the help that we get from the government until we are making attending salaries and can aggressively pay off the principle.

Edit: just double-checked the details of IBR. Looks like if your loan is subsidized originally than the government would pay the extra interest accumulated. If your original loan was subsidized, than you don't get the government subsidy benefit...anyhow, just pretend all of our loans were subsidized (I have to double check, its probably more like 50/50 for both of us). So, it might not be as good as I originally thought for the government subsidy. But it still might be good to do MFS to have increased cash flow (+$300/month) during this somewhat tight time.

TR;DR - MFS vs MFJ...both of us are residents with somewhat significant loans. Seems better to do MFS for IBR purposes, right?

 

[The White Coat Investor]

MFS vs MFJ...both of us are residents with somewhat significant loans. Seems better to do MFS for IBR purposes, right?

Yes, MFS generally works out better for a two doc couple doing IBR in residency. You can always run your taxes both ways to see how much of a difference ti makes. Software like Turbotax or like any tax prep firm uses can easily run it both ways and you can see exactly what your tax savings will be.

 

[RangerBob]

Yes, MFS generally works out better for a two doc couple doing IBR in residency. You can always run your taxes both ways to see how much of a difference ti makes. Software like Turbotax or like any tax prep firm uses can easily run it both ways and you can see exactly what your tax savings will be.

If I'm not mistaken, MFS means forfeiting the student loan interest deduction (which also helps as it's one of the few things that lowers your AGI a bit, and IBR is calculated based on AGI) as well as a number of other deductions that may or may not be applicable. I was also reading that apparently MFS also means paying at a higher tax bracket at a lower income than filing singly (as in a single person, not MFS), though whether it'd be significant or not I'm not sure.

I'm in the same situation as well, and when my wife and I get our W-4's I'll run taxes both ways to see what works best.

 

[redtomate]

Several years later, can you amend your tax return to MFJ to get any deductions which you have missed? This would give you the lowest possible payment for IBR with MFS, then later on adjust to MFJ?

 

[Lavan]

Most of your loans are unsubsidized. After 2012, there are no subsidized loans for graduate students, but even before it was maxed at $8,500 a year and $65,500 total. The main benefits of IBR is slowing down interest accumulation, preventing capitalization, and eligibility for PSLF if one is so inclined. You would get the subsidized interest covered for the first three years, but your IBR payments preferentially cut into this subsidy, making it much less powerful, and at 658 a month I'm pretty sure you would pay over the subsidy and get nothing.

The question is do the tax benefits of filing together outweight the IBR costs. It was for me last year. Part of this depends on how your IBR is set up. Depending on how your loan servicer works, it's possible to do IBR as an intern based on your MS3/MS4 taxes, which are very low. Then possible to do your PGY2 IBR as MS4/intern (half salary). It seems like most servicers have wisened up and are asking for pay stubs and whatnot to prevent this, but otherwise IBR as a PGY1/2 is very afforable (free, ~200).