With federal student loans about to re-enter repayment this autumn, the historically long Pandemic/COVID Forbearance has created some unusual circumstances which could impact your wallet.
The CARES Act Forbearance, which your federal loans are presently in, has created many unique scenarios within student loan repayment that, in my 25 years, I have never seen before. It has gone through about 8 extensions, I believe, though I lost count at some point! In many cases, we didn’t know if the next extension would begin or if payments would actually resume. As a result, the student loan world had to constantly prepare for payments to begin.
One of many significant ways this impacted borrowers is whether they should file Married Filing Jointly or Separately on their tax returns. When applicable, and after fully assessing a borrower’s situation, I may recommend that they file their taxes Married Filing Separately, in order to exclude their spouse’s income from the formula that creates the borrower’s qualified monthly IDR payment. This can make a big difference in the amount of your IDR payment each year. However, it also can significantly affect how much you have to pay in taxes to the IRS, as well.
The best way to file your taxes in accordance with your student loan situation is a complicated subject that takes into account the (proof of) income of both spouses, the federal student loan debt amount of both spouses, the types of debt they have, whether or not they live in a common property state and the difference in tax obligations to the IRS depending on whether your file jointly or separately, to name a few factors.
However, since the Pandemic Forbearance kept getting extended at the last minute, borrowers would often take the precaution of filing Married Separately, so that if payments restarted, they would be able to exclude their spouse’s income from the IDR payment calculation on the next IDR recertification.
3 years have passed now, and many borrowers have needlessly filed Married Filing Separately during this time period. This brings up a couple of questions.
Q: Can I amend my tax returns for this time period?
Yes, you can amend your returns or any tax filing year that was not used as proof of income for your IDR enrollment, recertification, or recalculation. In fact, most upcoming IDR recertification deadlines have been extended into 2024. So, if your next recertification deadline is after the date you file your 2023 tax return, then you can even file your taxes Married Filing Jointly for 2022, as well, and it will not affect your next IDR payment amount. Make sure to contact your student loan servicer to verify your next IDR recertification deadline before committing to this filing strategy. Alternatively, you can call me.
Q: Is it a problem if I continue to change my tax filing status each year?
It is not. You can change your tax filing status each year at your discretion, and still be in regulatory compliance with both the IRS and the US Department of Education. So, what is the moral of this story? If you’ve been filing Married Filing Separately during the pandemic, please take the time to discuss the option of filing Married Jointly with your accountant and/or me. The IRS just might owe you more money! I hope you found this post clear and helpful. If you have any questions about it, feel free to let me know.
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