How to Decide When to Use Married Filing Separately on Your Tax Return

In the United States, it’s important to consider your tax filing status when preparing your tax return. After all, the credits and deductions you’re eligible for — and the income tax you pay to the IRS — are based on how you file your taxes.

When you have student loan payments, your filing status can impact how much you pay on various plans. For some borrowers, filing separately can lead to lower monthly payments. However, the loss of some other tax benefits might offset the savings in your monthly budget.

Let’s take a look at what it means to file separately and the financial consequences.

What does “married and filing separately” mean?

Married filing separately is one of many tax filing statuses. The amount of your standard deduction and the income threshold for various deductions and credits are influenced by your filing status. In general, filing statuses include:

• Single
• Married filing jointly
• Married filing separately
• Head of household
• Qualifying widow(er)

When you’re married filing separately, each person in the marriage files their own tax return, rather than filing a joint return together.

How married filing separately works

Married couples can choose to file a joint return or separate returns. When filling out an income tax return, you would only report your own income and then take separate deductions and credits based on your eligibility. However, even though you might file separate returns, you must still do some things in tandem. 

If one of you itemizes your deductions, the other must list their tax breaks this way as well. Additionally, if you have children, you can’t both claim them as dependents for a larger tax refund. 

Depending on the situation, married filing separately can have an impact on your overall tax bill as a married couple, as well as impact which income-driven repayment plans you’re eligible for.

Benefits of married filing separately for student loans

When it comes to paying off higher education expenses that you got through a loan, filing separate tax returns might make sense. Here are some of the student loan repayment benefits that can come with filing separately.

• Ability to lower monthly student loan payments: Student loan borrowers who file separately might be able to see lower monthly payments because filing separately changes their income. They qualify for a lower payment and potentially loan forgiveness at the end of the term.
• Access to the new SAVE plan: The Biden Administration is replacing the old REPAYE income-driven plan with the SAVE plan. With some plans, a spouse’s income is still considered even when filing separately. However, with the SAVE plan and some other plans, a separate filing spouse’s income isn’t included.
• Overall savings, including interest savings: Even with a tax bomb later, when the balance of the loan is forgiven, there could be overall savings if you now match income limits for certain income-driven plans. For example, under the SAVE plan, the amount of interest is 100% subsidized. Student loan borrowers could potentially pay less if filing separately offers access to income-driven repayment, especially if they can get on a plan where the Department of Education subsidizes the interest.

Lost credits and deductions when filing separately for student loans

Before you decide that you need to file separately to qualify for a different income-driven plan, you need to run the numbers. Many taxpayers don’t realize that they could lose other benefits when all the focus is on reducing what they pay toward student loan debt.

Here are some things to consider before filers change their status.

The Child and Dependent Care Expenses Credit

This tax benefit is designed to provide a dollar-for-dollar reduction in your tax bill if you have to pay for dependent care. This credit can be for up to $3,000 or $6,000, depending on qualifying individuals. However, if you’re married filing separately, this credit isn’t available to either of the filers.

Education tax credits

Tax credits like the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are available if you or a dependent have qualified education expenses. However, these credits, which can reduce your tax bill directly, and might be partially refundable, can’t be claimed if you file a separate return from your spouse.

Student loan interest

The student loan interest deduction can help you reduce your taxable income if you meet the modified adjusted gross income (MAGI) requirements. While it’s not a direct reduction in your overall tax bill, the student loan interest tax deduction can still be useful in reducing what you owe. However, you can’t claim this deduction when you’re married and filing separately.

Tax loss harvesting

Lost money investing this year? Want to harvest those losses and carry over up to $3,000 to reduce your taxable income? The IRS cuts that available amount in half, to $1,500 when you file separately from your spouse.

Related: What to Know About Tax-Loss Harvesting’s Impact on Student Loans

Tax credits for premium support for ACA

Only those who file separately due to domestic violence or spousal abandonment can claim the premium tax credit that comes through the Affordable Care Act (ACA). For most student loan borrowers, the point of filing separately is to lower your income relative to your federal student loan balance so you can take advantage of an income-driven plan. However, if you make that choice, you won’t be able to claim the ACA credit, except in specific circumstances.

Higher-earning spouses are sometimes put into a higher tax bracket

When filling out your tax form, you might find that filing separately can push one of the spouses into a higher tax bracket. This is especially noticeable when one spouse makes significantly more than another. 

If one spouse makes a lot more in a tax year, having a lower-income spouse can mean a lower overall tax cost when filing jointly. Run the numbers for the total household tax bill in both scenarios to see if savings on monthly payments for qualified student loans are worth it.

Still have questions? How to get tax help

Dealing with tax law and trying to figure out how to do what’s best for your finances can feel like a daunting task. You might save money in your monthly budget by filing separately and qualifying for a plan like SAVE. However, considering phase out levels for certain tax benefits and losing the ability to claim specific credits and deductions, it might not be worth it. Run the numbers to see what is likely to be the most beneficial for you.

You can also reach out to Student Loan Planner for guidance. Our financial planning professionals help you compare your options, understand the tax consequences and figure out what would work best for you.