Should I file my taxes separately or jointly with my spouse when we have significant student loan debt?

Today’s post is a guest post by David Hoffman. He has been writing blog posts for a prominent computer vision and image processing software website for two years.

David was also married in 2018 (he is my brother-in-law and we were both in each other’s weddings). Marriage impacted his and his wife’s taxes and David is here to share his insights with you today.

Just two years ago, I was about to finish my master’s thesis and wrap up grad school. I was focused on school but during finals week, I received a direct message via Twitter…

The message was from an image process/computer vision software blog I was following — PyImageSearch.com.

That message led to some contract work where upon graduation, I found myself writing 3-4 technical blog posts per week as a ghostwriter and typesetter.

I quickly grabbed an EIN (employer ID number) from the government so I could register my business as a sole proprietor to keep things easy.

Taxes weren’t on my mind.

I just used the extra income for fun money and investing. I opened an investment account — an “individual 401K” (similar to a SEP) through Vanguard where I was acting as both the employer and employee of my retirement plan. More on that in another post 🙂

Come October, I quit my day job, eliminated a client that was hard to work with, and signed a contract to work full time for the image processing blog.

Come December/January (looking towards April), I realized that I should probably figure out my taxes.

I figured it out with the help of my (then) fiance’s family’s accountant.

Ben actually had me on YMF to share what I learned: I’m self-employed, what is different about my taxes?

Estimated quarterly taxes became part of my routine. I stamped the due dates on the calendar and saved money each month so that I could pay the bills since at this point I was on my own without having an employer take them out for me.

That got me through 2017 and 2018. I’m now ready to pay Q1 2019 taxes in April as well this year.

Sounds easy.

But something changed for this 2018 tax filing season.

In May of 2018, I was married.

Should I file taxes jointly or separately?

When I was getting all of my documents together to send to my tax accountant, I had to decide if my wife and I would either be:

• “Married filing jointly” for 2018
• “Married filing separately” for 2018

My accountant and I talked about it, and I did a little bit of homework with my wife.

Most people can and should file jointly.

However, there are some extenuating circumstances that may affect us yopros and lead us to file separately.

Elizabeth and I chose to file separately and we’ll actually save a ton of money this way.

It isn’t for everyone, but if your situation is similar to ours, you might elect to file separately for a number of years prior to filing jointly.

I bet Ben will post an article about the benefits of filing jointly as well.  And maybe even one about how taxes are affected with kids (i.e. baby YMF! #proudtobeanuncle).

For today, let’s review both my (David) and Elizabeth’s scenario.

One such tax scenario for young professionals who are “married filing separately”

Elizabeth and I are like most young professionals: we put off income and dove into debt in order to fund our education.

Our parents had four kids and even more horses. Feeding the horses and making things fair for all of us kids meant that we had to figure out college finances on our own.  Our parents were very generous and helped us with cell phones, cars, and health insurance for all or part of the time. We were and are all very grateful.

While both Elizabeth and I worked through college, we were, and still are in many ways, in a deep hole of debt trying to dig ourselves out.

We generally keep this private, but for the purposes of this article, it makes sense to share. Together, we both owe over $350K in student loan debt. My wife owes about double what I owe. All of her debt is owed to the federal government.

Despite our debt, we have 5 degrees between the two of us and we’re both working in our fields of study.  Between November and January, we actually paid off over 30K in debt for my student loans. You’ll soon see why we reduced my student loans and not Elizabeth’s.

Student loan forgiveness, income reduced payments (IRP), and pay as you earn (PAYE)

Elizabeth works for a non-profit hospital and qualifies for “student loan forgiveness” with 10 years of service and on-time payments for all 10 years.

As for me, I don’t work for a non-profit. Thus, Elizabeth and I are knocking down my debt with gazelle intensity the best we can.

Elizabeth has 5 years remaining before we expect that the federal government will stick to their promise to forgive her government loan debt.

I’m not fully convinced that the government will abide by its promise, but I have my fingers crossed.  Actually, Dave Ramsey says quite often on his radio show that only about 1% of the people that apply for their debt to be forgiven are able to get their debt forgiven by the government.  We really hope we are in that 1%.

Elizabeth also qualifies for income reduced payments, because despite her doctorate in physical therapy (DPT), she doesn’t get paid the amount you’d think for the hole of debt she took out for her degrees.

The strategy is to pay as little as possible now, but make all 10 years of on-time payments on her loans since the entire balance will be forgiven by Uncle Sam in 10 years (she has 5 years remaining).

Here’s the tricky part about taxes when you’re in a situation similar to ours

If Elizabeth and I were to file jointly for the next 5 years, she would actually not qualify for the income reduced payments.

That would drive our payment for her loans from about $400 a month to over $2,500 per month.

It is significant!

So we are “married filing separately” such that my high(er) income doesn’t impact her “income reduced” payment amount.

This is actually quite a common scenario, especially for health professionals (or other professionals), with debt where one spouse works for a non-profit with debt and one spouse does not.

So how does the math work out?

I’m not a CPA or CFP, so I’m not going to get into it here on YMF’s blog.  Instead, you should read this well-researched article which served as our guide:

The math behind married filing separately for IBR (Income Based Repayment) and PAYE (Pay As You Earn) with student loan debt – The College Investor, February 2019

You should calculate all the numbers just as they did in a spreadsheet to determine the best situation (joint or separate taxes) for you.

Either way, be sure that you share the article and your calculations with your accountant.

Considerations for “married filing separately”

Keep these points in mind (using the math from The College Investor’s article):

• If you are filing separately, then you can’t deduct student loan interest.
  In our case we still come out ahead, despite this.
• If one of you itemizes, you both have to itemize and likewise, if you do not itemize, then you both do not itemize.
  This was something that surprised me. I’m used to itemizing my taxes, but for the next 5 years, I’ll likely be taking the standard deduction depending on my income growth.  I’m still able to reduce my taxable income by accounting for my business expenses.

Conclusion

So based on everything discussed here and with my accountant, Elizabeth and I are “married filing separately and we’re both taking the standard deduction”.

Please consult a tax professional. A great option is to hire a personal accountant to help you with your taxes.

In fact, the average person that hires a tax professional/accountant to prepare their taxes typically saves more than $800 on taxes as compared to someone that uses do-it-yourself software online.  I probably save triple that amount!

My wife insists that she is smarter than the tax paperwork and likes to use tax software (we’re filing separately for the next 5 years after all).

If that’s you, consider Turbo Tax or H&R Block.

Turbo Tax has free professional advice and even offers a webchat feature (I used it once to figure out how to claim depreciation on a property I owned and it was easy and free!). My understanding is that H&R Block has a similar feature.

Best of luck this tax season!

And remember, I’m not a tax professional!

Cheers!

David Hoffman