Student loan tax deduction, filing separately for IBR next year.

[gasthrowaway]

I tried doing some research and just wanted to get some confirmation on this. Im a 4th year medical student that will be starting residency next year. Married, wife works, makes around 50k, we have no kids. We filed jointly last year to take advantage of the 2500 tax credit.

I want to do IBR and file separately when I start repaying my loans on Jan 1st. From what I understand, we need to file separately this year, so that when I apply for IBR and they ask for a tax stub, they'll see that we are separate. But that means we will lose out on the 2500 this year.

Am I correct?

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[RangerBob]

I tried doing some research and just wanted to get some confirmation on this. Im a 4th year medical student that will be starting residency next year. Married, wife works, makes around 50k, we have no kids. We filed jointly last year to take advantage of the 2500 tax credit.

I want to do IBR and file separately when I start repaying my loans on Jan 1st. From what I understand, we need to file separately this year, so that when I apply for IBR and they ask for a tax stub, they'll see that we are separate. But that means we will lose out on the 2500 this year.

Am I correct?

If by "the 2500" you mean the student loan interest tax deduction of up to $2500 then yes, you cannot claim that if you file as married filing separately. If you meant something else, then I'm not sure which tax deduction or credit you're referring to. Though, if you file separately I believe you will generally pay more in taxes. True, your IBR payments between the two of you will be lower than if you file jointly, but I don't think it'd be a significant savings on your monthly payment--unless one of you qualifies for the $0 payment, which you won't unless you apply for consolidation and IBR prior to starting residency or your wife stops working.

 

[gasthrowaway]

If by "the 2500" you mean the student loan interest tax deduction of up to $2500 then yes, you cannot claim that if you file as married filing separately. If you meant something else, then I'm not sure which tax deduction or credit you're referring to. Though, if you file separately I believe you will generally pay more in taxes. True, your IBR payments between the two of you will be lower than if you file jointly, but I don't think it'd be a significant savings on your monthly payment--unless one of you qualifies for the $0 payment, which you won't unless you apply for consolidation and IBR prior to starting residency or your wife stops working.

yes, the student loan interest tax deduction is what Im referring to. IBR for me alone would be about $350. If I file with my wife its $1000. A pretty massive difference.

 

[RangerBob]

yes, the student loan interest tax deduction is what Im referring to. IBR for me alone would be about $350. If I file with my wife its $1000. A pretty massive difference.

I assume your wife has no loans then, correct? Otherwise her IBR payment would probably be ~$400/month, so it'd only save you about $250/month (which is still a fair amount).

Either way, it sounds like the two of you will have a very good combined income and could absorb that high IBR payment. I still think it's worth considering filing jointly to take advantage of all the things the government "pays for." Like being married (could save you ~2k in taxes), paying student loan interest (you pay $2500, which results in lower taxes AND a lower AGI which then saves you a little bit in IBR the following year), and going to school. The latter could result in you getting a lot of money back--if your school charges you tuition on or after January 1st (during the 22014 tax year) you are eligible for the lifelong learning credit (not to mention you're eligible this year if you file jointly). My school billed me in December, so unfortunately I'm not eligible this year--if I was, I would have gotten all my withholdings back (approx $3000). My wife doesn't make too much though, and I only have half a year's salary to report, but I think it'd still be worth you looking into, because once again I don't believe you can claim that credit unless you file jointly.

My guess is if your wife has no loans then you will still pay more if you file jointly, even if you qualify for all those tax breaks, since your IBR payments differ by almost $8,000/yr. But I think that gap will be bridged pretty well by all the money in taxes you save. Plus, you will have then paid $12,000 of your loans off, compared to $4200. Personally I'd consider paying even more money on top of your IBR payment, so that you have a good chuck paid off by the time residency is finished.

FYI, it's possible with your combined incomes you won't qualify for the student loan interest deduction--it gets phased out at certain incomes.

 

[freaker]

As a quick aside, getting a student loan deduction won't lower your AGI. Only things like investing in your 401k/403B or paying your healthcare premiums on a pre-tax basis will do that.

It's really not worth a ton of money, either. Even if you're in the 25% tax bracket, it's worth only $625.

 

[RangerBob]

As a quick aside, getting a student loan deduction won't lower your AGI. Only things like investing in your 401k/403B or paying your healthcare premiums on a pre-tax basis will do that.

It's really not worth a ton of money, either. Even if you're in the 25% tax bracket, it's worth only $625.

I believe you're mistaken--from what I've read the student loan deduction does in fact lower your AGI. But I think it's absolutely worth it--most of us will (or should) be paying at least the PAYE or IBR amount, which alone will generally get you up to $2500 in interest paid over the year. I paid about $2600 last year (I made additional payments). And then Uncle Sam is giving us back ~$400-$500 for it. Seems win-win to me--we get to pay off some of our debt, and Uncle Sam meets us partway. If you're pressed for money I guess it's another matter.

 

[Doctor Peloncito]

Whatever you do, make sure you pay as much now as possible. When you start making real money, you won't qualify for any deduction as you will likely make too much! Thanks uncle sam for f***ing us who have been poor for so long!!!

 

[nogolfinsnow]

Run your taxes both ways and see what the totals due are. There are certain deductions you can't claim if you file separately, and you can't contribute to a RothIRA if you file separately. I think you should pay as much as you can. You'll be pulling in 100k/year combined, I would strongly recommend keeping expenses down and paying as much as you're able to toward your loans now. Compound interest is bitch when it's not working in your favor.