IBR and Married Filing Separately

[snoggy6]

I am graduating from med school this year and will start residency in July. I am married with no kids and my wife works full time. I have been told I should use IBR. My residency will be 5 years and it's likely I will work at a non-profit hospital after that, which would make PSLF a possibility. The problem is, with my wife's income, IBR won't give me much benefit unless we file our taxes 'Married Filing Separately'. But doing so will cost me at least $2000 on my tax return this year (as I won't be able to take the Lifetime Learning Credit), and in subsequent years I won't be able to deduct student loan interest. Someone advised me that I could file my taxes 'Married Filing Separately' for IBR purposes, and within 3 years I can amend the return to 'Married Filing Jointly' to recoup those losses. Has anyone else tried this? Is it even legal? It seems like the government could come back and say I owe them a ton more money for my past IBR payments once I amend my return.

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[TMP-SMX]

Your options:
1) Forbearance and face mounting interest.
2) Standard Repayment with paying a large amount, being broke, losing the possibility of PSLF, and losing the subsidy for unpaid subsidized Stafford interest
3) IBR with maximum repayment up to the Standard Repayment amount, the possibility of PSLF, unpaid subsidy for subsidized Stafford Interest.

Simply put, there are tax ramifications of filing separately and if you can't make the payments for loans you can't make the payments. IBR should be a lower amount than standard repayment and has more benefits.

 

[snoggy6]

Your options:
1) Forbearance and face mounting interest.
2) Standard Repayment with paying a large amount, being broke, losing the possibility of PSLF, and losing the subsidy for unpaid subsidized Stafford interest
3) IBR with maximum repayment up to the Standard Repayment amount, the possibility of PSLF, unpaid subsidy for subsidized Stafford Interest.

Simply put, there are tax ramifications of filing separately and if you can't make the payments for loans you can't make the payments. IBR should be a lower amount than standard repayment and has more benefits.

Thanks for your reply, TMP-SMX. I am not considering forbearance or the standard repayment options; I will definitely do IBR. I'm just trying to decide about filing taxes separately or jointly. I am concerned about the legality of filing 'Married Filing Separately' to get the lower IBR payment, and then later amending my return to 'Married Filing Jointly'. I know it's legal as far as the IRS is concerned, but I don't know if the organization that handles the IBR program would look very favorably upon it. Using this option would substantially lower my IBR payment and eliminate the tax consequences of a separate return (since when I amend it, I will get the extra money back.) But I don't want the loan servicer to come after me later saying that I owe extra money since I amended my tax return, or worse to be told in 10 years that I don't qualify for PSLF because I did not pay the right amount during IBR.

 

[TMP-SMX]

You could probably get away with it, but you are supposed to update your loan servicer if there is any change in your income or 1040. There is a form releasing your tax info to the servicer as well.

Does your spouse have loans as well?

 

[snoggy6]

You could probably get away with it, but you are supposed to update your loan servicer if there is any change in your income or 1040. There is a form releasing your tax info to the servicer as well.

Does your spouse have loans as well?

No, my spouse has no loans.

 

[MT Headed]

Someone advised me that I could file my taxes 'Married Filing Separately' for IBR purposes, and within 3 years I can amend the return to 'Married Filing Jointly' to recoup those losses. Has anyone else tried this? Is it even legal? It seems like the government could come back and say I owe them a ton more money for my past IBR payments once I amend my return.

This is the most creative use of "double-entry bookkeeping" I have ever heard.

One set of books for the IBR, a separate set of books for the IRS. Good luck with that!

 

[digitlnoize]

I'm in the same boat.

For 2011, we filed jointly, since I had no income. For 2012 though, we're planning on filing "Married filing Separately."

My wife makes ~$50k/yr, and if we file together, my IBR payments will be ~$1000 per month. If we file separately, my IBR payments will be ~$280-ish. $700/mo "savings" x 12mo = $8400/year saved. Subtract a $2k loss for taxes, and you still come out ahead.

I'm looking for more details about just what deductions you lose by filing Separately. We also a 1 child, no loans. I think my wife would be claiming the kid, which means that I can't.

I'm doing IBR->PSLF. Child Psych = 5 year residency. Then planning on working at a local state hospital (~$200k/yr) x 5 years, while paying ~2k/month on IBR. Will pay total ~$100k-ish to my loans over the 10 years, almost all of which will be interest. PSLF will forgive the remaining $250k or so. Definitely a sweet deal.

Option 2, which we might still do, is just continue living like residency (which is $100k combined income) for 2-3 years, putting $150k of my salary towards loans, which should pay them off in 2-3 years. This is definitely the safer option, but not the cheaper one.

I expect PSLF to be around for 10 more years. If you look at the history of changes to the loan repayment programs, they almost always apply to "loans originated after Date X." So, if they decide to do away with IBR+PSLF, it would most likely apply to loans originated after the cut-off date.

 

[snoggy6]

I'm looking for more details about just what deductions you lose by filing Separately. We also a 1 child, no loans. I think my wife would be claiming the kid, which means that I can't.

I'm not an accountant or anything, but from my research, here are some of the disadvantages of married filing separately:
1. You can't deduct student loan interest you pay.
2. If one of you itemizes, both must itemize. Even if those itemized deductions for one person are less than the standard deduction. So you could end up with one spouse with no deduction at all.
3. You can't claim adoption expenses or child and dependent-care costs.
4. You might find the child-tax credit reduced because it phases out at different income limits for the various filing statuses.
5. You can't get Hope or Lifetime Learning Educational Credits.
6. You can't contribute any money to an IRA if you make more than $10,000.
7. The tax brackets are worse with this filing status. If you make enough money, you'll end up paying a higher marginal tax rate than you would filing jointly.

Like I said, I'm not an accountant, so you should research these things yourself. But I calculated my taxes both ways this year, and filing jointly, I got a refund of about $1200. Filing separately, I owed over $5000. Certainly the $2000 education credit that I couldn't take played some part in that, but the rest was just the disadvantages of that filing status. Add that to the fact that my wife wouldn't have been able to contribute to her Roth IRA, and I decided that filing jointly was better for us, regardless of the "savings" I would see with my IBR payment.

Also important to note, married filing separately works differently if you live in a community property state (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin). Not sure exactly how those rules work, but I believe you have to split everything 50/50.

 

[wifehasbigloans]

My understanding is that in the first 3 yrs, the gov't will cover any interest that your payments do not pay. When we did our taxes, it would cost $5K more to file separately (higher taxes), but we would save $7K in loan payments. I did not realize that the gov't was going to forgive the interest that built up, so I filed jointly, and lost that $2K.

I think that in the next two years, we will file separately, minimize my wife's ibr payments, and save cash. Then, after the first 3 yrs, put all of that savings toward knocking down the principal.

Regarding deduction of interest, my understanding is that you will only be able to deduct $2,500, and that is if you have a joint income of less than $120K. Above $150K, you cannot deduct interest, so it is likely not a benefit to you. Am I wrong?

 

[snoggy6]

My understanding is that in the first 3 yrs, the gov't will cover any interest that your payments do not pay. When we did our taxes, it would cost $5K more to file separately (higher taxes), but we would save $7K in loan payments. I did not realize that the gov't was going to forgive the interest that built up, so I filed jointly, and lost that $2K.

I believe the gov't only covers interest on subsidized loans, not unsubsidized. And for me, subsidized are only about 20% of all my loans. So the rest of my interest will just keep building up under IBR.

Regarding deduction of interest, my understanding is that you will only be able to deduct $2,500, and that is if you have a joint income of less than $120K. Above $150K, you cannot deduct interest, so it is likely not a benefit to you. Am I wrong?

Our joint income will likely be below $150K, and the first year of residency will be well below $120K since I will only work half of the calendar year. So the student loan interest deduction is something to consider for some married couples. Once I'm out of residency though, we probably won't qualify.

 

[badasshairday]

OP, what did you end up doing? IBR? It looks like you decided to file jointly, what about repayment? I'm in the exact same situation.

 

[snoggy6]

OP, what did you end up doing? IBR? It looks like you decided to file jointly, what about repayment? I'm in the exact same situation.

We filed our taxes jointly, because we couldn't afford to pay $5000 that we would have owed if we filed separately. I also didn't feel very good about the advice I got regarding filing separately, then amending it later to jointly to get money back. Next year I'll probably do the calculation again at tax time to see what the difference is. But filing separately really seemed like a beast, and you need to be very intentional about whose name(s) are on bank accounts, investment accounts, charitable donations, etc.

My loan repayments don't start until Dec/Jan, but I plan on doing IBR.

 

[digitlnoize]

We filed our taxes jointly, because we couldn't afford to pay $5000 that we would have owed if we filed separately. I also didn't feel very good about the advice I got regarding filing separately, then amending it later to jointly to get money back. Next year I'll probably do the calculation again at tax time to see what the difference is. But filing separately really seemed like a beast, and you need to be very intentional about who's name(s) are on bank accounts, investment accounts, charitable donations, etc.

My loan repayments don't start until Dec/Jan, but I plan on doing IBR.

Interesting. Thanks for the update. Not sure what we're going to do yet. Going to crunch the numbers in January and see where we are. We filed jointly last year.

I'm betting we're going to file separately this year. My wife and I make almost equal amounts, so from what I can find the status should hurt us less than otherwise...but I'll have to run the numbers both ways to see which is better vs. the higher loan payment.

In 2013 though, we may have to file separately. In 2012, I'll only have 1/2 a year salary. In 2013, when we have both of our salaries for an entire tax year...that's going to hurt my IBR payments bad.

I'm curious about exploring this amended status thing. You have up to 3 years to change it. Certainly IBR can't go running back to you 3 years later asking to increase your payments from 3 years ago. I can't imagine that they'd ever even know about it. It's not like these agencies actually speak to each other or anything. Besides, are we even sure that would change anything, even if you told them, "oh, by the way, I changed my filing status for my 3 year old taxes..."

 

[snoggy6]

I'm curious about exploring this amended status thing. You have up to 3 years to change it. Certainly IBR can't go running back to you 3 years later asking to increase your payments from 3 years ago. I can't imagine that they'd ever even know about it. It's not like these agencies actually speak to each other or anything. Besides, are we even sure that would change anything, even if you told them, "oh, by the way, I changed my filing status for my 3 year old taxes..."

Yeah, I doubt that will happen. The worst case scenario I could think of was that when applying for PSLF, will they want to see tax returns or anything at that point to verify that you made 10 years of valid payments?

Also, the other problem I thought of with the amended tax return is that it doesn't help when it comes to contributing to IRAs. It basically becomes impossible to contribute when you file separately (because the income limits are so low), and when you amend your return, you won't be able to go back in time to make those contributions.

 

[badasshairday]

Interesting
In 2013 though, we may have to file separately. In 2012, I'll only have 1/2 a year salary. In 2013, when we have both of our salaries for an entire tax year...that's going to hurt my IBR payments bad.

Why not just forebear than? In that case you don't have to worry about your payments jumping and you can pay as much as you can.

I'm sort of in the same boat. I want to start paying back loans, somewhat aggressively but I don't have to HAVE to pay a certain amount each month. I crunched the numbers for year 2 of IBR and I will HAVE to pay 1400$ a month. I would pay this amount anyways while forbearing starting now, but in the future year 3 and beyond of IBR, we may make enough money to have a >2K per month payment. So any bump in my income through moonlighting, or the wife's income through her bonus structure would get eaten by IBR.

If I forebear I can stick to somthing like 1800$ a month throughout my 5+ years of training then pay it off aggressively when I am an Attending.

The only reason I am thinking about IBR is because I don't want to lose any tax benefits like deducting loan repayment and interest. I'm not sure if you lose this by forbearing and making payments. Also I am thinking about getting a house next year, so forbearing might be helpful in terms of getting a home loan. Not sure though. Insight would be appreciated.

 

[digitlnoize]

Because we want to do PSLF.

 

[badasshairday]

I guess we will do IBR this year. Then re-eval next year. May forbear and make payments then if our IBR payment becomes very high.