Tax Tip #314

Rule of thumb: Married couples generally pay more in federal income tax when they file separately rather than jointly. However, there are situations where filing separately can make financial sense—particularly when one spouse has federal student loans and the monthly payment is based on household income. 

Here is an example of when it can be beneficial. One spouse has student loans & is on the Repayment Assistance Plan (RAP) where income determines the monthly student loan payment. Each spouse earns $50,000 in wages & has nothing else. Filing separately, combined they would pay approximately an extra $3,800 in federal tax. The RAP calculation if filing jointly would be approximately $750 a month. Filing separately, the monthly payment would be approximately $170 per month for an annual savings of approximately $7,000. 

In this example, filing separately when including the student loan payments provides approximately an additional $3,200 in cash flow for the year. 

There are other factors to take into consideration such as student loan interest is not available for taxpayers filing separately. 

Have student loans & are married? Want to know which is most beneficial? Reach out to a team member.