A reader asks: What will happen to my IBR if I file MFJ instead of MFS?

A reader writes:

I have a number of loans that I have consolidated and am now in an Income Based Repayment plan (I have $0.00 payments because I do not make a lot of money at my job).  I recently got married and was told that if my husband and I file a joint tax return, his income will be factored into these IBR loans and likely increase the payment (even though he doesn’t make that much either).  Is this true?  By not filing together we are definitely missing out on some nice tax breaks, but I’m concerned how much the loan repayment may end up being.

First off, it is true if you file a joint tax return you do have to consider both individuals income.  But also as you have stated, there are downsides to filing separately as well.  If this was a question at work I would instantly tell you to contact your tax professional and determine what the best route is.  While you should still consult with someone who is great with taxes, I do want to explore this issue with you a little further.

If you file Married Filing Separately, these special rules apply.  This is not even close to a comprehensive list, but will help show you some of the downsides to filing separately.

1. Your tax rate will generally be higher than it would on a joint return.

2.You cannot take the credit for child and dependent care expenses in most cases

3. You cannot exclude any interest income from qualified US savings bonds that are used for higher education

4. You cannot take the earned income credit

5. The following deductions and credits are reduced at income levels that are half those for joint returns a) Retirement savings contributions credit  b)Deduction for personal exemptions  c)Child tax credit  D)Itemized Deductions

Now once you figure out what all the deductions or credits are that you are losing and what it costs you, you just need to compare it against the difference in your Income Driven plan for MFS vs MFJ.

Let’s look at an example.  Let’s say you make $23,000 and your spouse makes $30,000.00.  You have no kids.  You have a consolidation loan with a 6.80% interest rate that is $150,000.00.  Let us assume you only have loans that qualify for Income-Based Repayment.  Using a repayment estimator, your payment would be $0.00 a month (family size 2).  If you add your spouses income, it would jump around $368.00 a month.  So you are paying about $375.00 a month more filing jointly.  If you receive less than $4,500.00 in tax benefits for the difference, then it will benefit you.  If your example runs the other direction it would not.

So my best advice for you is use the estimation calculator provided or the one on your servicers website.  After you have these estimations, visit your local tax professional, crunch some numbers and decide!  But overall it is a simple math equation!