SAVE Plan: When and How to File Taxes Separately as a Married Couple

Nearly 94% of all married Americans file joint tax returns, according to the latest IRS data. But is that the smartest decision for those couples with federal student loans?

The Saving on a Valuable Education (SAVE) plan is a new income-driven repayment (IDR) plan for federal student loans that introduces several benefits significantly affecting married borrowers.

Under the SAVE plan, married borrowers can file taxes separately, considering only the borrower’s income for the monthly payment calculation. This can lower student loan payments but may cause the loss of certain tax benefits.

In this article, we’ll explore four key aspects of the SAVE plan and its impact on married borrowers:

1. The SAVE plan’s features and how they affect married borrowers, including when it might make sense to file taxes separately.

2. The tax implications of filing separately vs jointly, including potential drawbacks and considerations for retirement contributions and tax credits.

3. A step-by-step guide for determining whether filing separately is right for you and how to move forward with the process.

4. Alternative strategies for reducing student loan payments and navigating the complexities of the current system.

Related: Am I Responsible For My Spouses Student Debt?

President Biden’s new SAVE Plan is designed to make student loan repayment more affordable for borrowers by basing their monthly payment amount on their income and family size. Here are the key features of the plan that are most relevant to married borrowers:

1. Monthly Payment Calculation: Under the SAVE Plan, payments are calculated as 5% to 10% of a borrower’s discretionary income, which is defined as the amount of income above 225% of the federal poverty line. This is a significant increase from the previous threshold of 150% under other IDR plans, meaning more income is protected from being included in the payment calculation.

2. Interest Subsidy: One of the most notable features of the SAVE Plan is its interest subsidy. As long as borrowers make their required monthly payments, the SAVE Plan eliminates interest. Any unpaid interest will not be capitalized or added to the loan balance. This helps prevent the loan balance from growing, even if the payment doesn’t cover the full amount of interest accrued each month.

3. Income Exemption: The SAVE Plan’s increased income exemption is beneficial for married borrowers. By shielding a larger part of their income from the payment calculation, it can result in lower monthly student loan payments, especially if the couple has a lower combined income or if only one spouse has student loan debt.

4. Married Borrowers: The plan lets married borrowers file taxes separately, and only the borrower’s income will be considered for the monthly payment calculation. This is a significant change from the REPAYE plan, where spousal income was included despite tax filing status. Filing separately under the SAVE Plan can lower the monthly student loan payment for the spouse with student loan debt.

Starting this summer, the SAVE program will implement new features that significantly reduce payments for borrowers with undergraduate loans, cutting them from 10% to just 5% of income above 225% of the poverty line.

Borrowers with a mix of undergraduate and graduate loans will see their payments adjusted to a weighted average based on the original principal balances of their loans, ranging between 5% and 10% of their income.

But those with FFEL Loans won’t benefit from these reductions unless they consolidate their loans into a Direct Consolidation Loan, since SAVE applies only to Direct Loans. To determine your loan type or to consolidate your loans, visit StudentAid.gov.

Related: Are Parent PLUS Loans Eligible for the SAVE Plan?

When considering the SAVE plan, married borrowers must understand the tax implications of filing separately versus jointly. Here are the main things you should know:

Tax Brackets and Rates

MFS tax brackets are half of the MFJ brackets, meaning that MFS filers reach higher tax rates at lower income levels compared to MFJ filers. This can result in a higher overall tax liability for couples who choose to file separately.

Lost Credits and Deductions

Filing separately can affect eligibility for several tax benefits that are relevant to married borrowers with student loans:

1. Student Loan Interest Deduction. MFS filers cannot claim this deduction, which lets borrowers deduct up to $2,500 of interest paid on qualifying student loans.

2. IRA Contribution Deduction. The deduction for contributions to a traditional IRA may be reduced or eliminated for MFS filers, depending on their income and coverage by an employer-sponsored retirement plan.

3. Earned Income Tax Credit (EITC) and Education Credits. These valuable credits are unavailable to MFS filers, which can significantly affect the overall tax liability for eligible couples.

Retirement Contributions and Tax Credits

MFS can affect your ability to contribute to IRAs and claim certain tax credits. The income thresholds for deducting IRA contributions and contributing to Roth IRAs are much lower for MFS filers. Additionally, MFS filers are generally ineligible for credits like the the Child and Dependent Care Credit.

Community Property States

In community property states, married couples who file separately must follow special rules for reporting income and deductions. Each spouse generally reports half of the total community income and splits deductions related to that income. This can complicate the tax filing process and may affect the overall tax liability.

For a more detailed explanation of how community property states can impact your student loan repayment strategy and tax filing decisions, please read our article: “Community Property State: Student Loans and Taxes.

When MFS Might Be Beneficial

Despite the general advantages of MFJ, in some cases MFS might result in a lower overall tax liability or be useful for student loan repayment:

1. Income-Driven Repayment Plans: MFS can lower monthly student loan payments under IDR plans like SAVE, as only the borrower’s income is considered for the calculation.

2. High Medical Expenses: If one spouse has significant out-of-pocket medical expenses, MFS might let them exceed the deduction threshold more easily.

3. Liability Concerns: MFS can protect one spouse from potential tax liabilities related to the other spouse’s financial issues.

Related: SAVE Plan Tax Bomb

When deciding whether to file taxes as Married Filing Separately (MFS) or Married Filing Jointly (MFJ), married borrowers should consider several key factors that can affect their financial situation and student loan repayment strategy.

Calculating and Comparing MFJ vs. MFS

To determine which filing status is most beneficial, married borrowers should calculate their taxes and student loan payments under both MFJ and MFS scenarios. Here’s a brief guide:

1. Gather necessary financial documents, including W-2s, 1099s, and student loan statements.

2. Use tax preparation software or consult with a tax professional to estimate your tax liability under both MFJ and MFS.

3. Use the Federal Student Aid’s Loan Simulator or consult your loan servicer to estimate your monthly student loan payments under IDR plans like SAVE for both filing statuses.

4. Compare the total annual cost (tax liability + student loan payments) for each scenario to determine which tax filing status is most useful.

Related: Can Married Filing Separately Claim Student Loan Interest Deduction?

Real-Life Example

Consider a married couple, John and Sarah. John earns $50,000 per year and has $60,000 in student loans. Sarah earns $100,000 per year and has no student loans. If they file jointly, their combined income of $150,000 would result in a higher IDR payment for John and potentially push them into a higher tax bracket.

By filing separately, John’s IDR payment would depend only on his $50,000 income, resulting in a lower monthly student loan payment. This strategy could be particularly beneficial if John is pursuing loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF). But the couple should also consider the potential drawbacks of MFS, such as losing certain tax credits and deductions.

Related: Is the SAVE Plan Worth It?

Income Differences and Tax Liability

If there is a significant income disparity between spouses, where one spouse’s income is much higher than the other, MFS might be beneficial. Combining incomes in a joint filing could push the couple into a higher tax bracket, increasing their overall tax liability. MFS lets each spouse be taxed only on their individual income, potentially resulting in a lower combined tax burden.

Separate Financial Liabilities and Medical Expenses

Filing separately can protect you from being responsible for any inaccuracies or fraud on your spouse’s tax return. It can also be beneficial if one spouse has significant medical expenses, as a lower individual AGI might let more expenses be deductible.

1. Evaluate Your Eligibility and Understand the Benefits. Confirm that you have eligible federal direct student loans and understand how filing separately can lower your monthly student loan payments under the SAVE plan. If you’re on another IDR plan, you may be automatically transitioned to SAVE or can switch manually.

2. Calculate Your Discretionary Income and Estimate Payments. Determine your discretionary income by subtracting 225% of the Federal Poverty Level for your family size from your AGI. Use the Federal Student Aid’s Loan Simulator to estimate your monthly student loan payments under the SAVE plan based on your discretionary income.

3. Prepare Your Tax Return and Allocate Income and Deductions. Gather necessary financial documents and coordinate with your spouse to properly assign income and deductions. In community property states, you may need to split income evenly.

4. Compare Tax Implications with Student Loan Payment. Savings Calculate your estimated tax liability when filing separately and compare it to the potential savings from reduced monthly student loan payments under the SAVE plan. Determine whether the net financial impact is favorable.

5. Submit Your Tax Return and Recertify Your Income with Your Loan Servicer. File your tax return as Married Filing Separately and recertify your income for the SAVE plan yearly by providing updated information to your loan servicer. Aim to recertify shortly after filing taxes to ensure your payments reflect your most recent income.

6. Track Changes and Adjust Your Strategy. Stay informed about updates to tax laws and student loan policies that may affect your situation. Regularly review your repayment plan and tax filing status to ensure you’re maximizing the benefits of the SAVE plan.

By following these steps and seeking professional advice when needed, married borrowers can make informed decisions about filing separately under the SAVE plan and effectively manage their student loan repayment obligations.

While filing taxes separately can help reduce student loan payments under the SAVE plan, married borrowers may also benefit from exploring other strategies to manage their debt more effectively.

In this section, we’ll discuss several alternative approaches, including lowering your AGI through retirement contributions, taking advantage of employer assistance programs, and exploring loan forgiveness and discharge options.

Lower AGI Through Retirement Contributions and Pre-Tax Deductions

One of the most accessible ways to reduce student loan payments under IDR plans is to lower your Adjusted Gross Income (AGI). By contributing to retirement accounts like a 401(k) or IRA, or exploiting pre-tax deductions such as health savings accounts (HSAs) or flexible spending accounts (FSAs), you can decrease your taxable income and your monthly student loan payments.

For example, if your AGI is $50,000 and you contribute $5,000 to a 401(k), your AGI would be reduced to $45,000. Under the SAVE plan, this could lower your monthly payment from $167 to $130, assuming a family size of one and no other changes in circumstances.

Take Advantage of Employer Assistance Programs

Some employers offer student loan repayment assistance as part of their benefits package. This help can come as direct monthly payments towards your loans, which are tax-free up to $5,250 yearly until the end of 2025.

Additionally, under recent legislation, employers can make matching contributions to your 401(k) plan based on your student loan payments. While this doesn’t directly reduce your loan payments, it lets you maintain retirement savings while paying off your loans.

Explore Loan Forgiveness and Discharge Options

Depending on your career path and other factors, you may be eligible for loan forgiveness or discharge programs. Public Service Loan Forgiveness is a federal program that forgives the remaining balance on Direct Loans for borrowers who work full-time for government organizations, non-profits, or other qualifying employers and make 120 qualifying monthly payments under an income-driven repayment plan. This can be a valuable option for borrowers in public service careers, as it can significantly reduce their overall student loan burden.

Income-Based Repayment (IBR) is another IDR plan that can help reduce monthly payments based on your income and family size, with forgiveness available after 20-25 years of qualifying payments.

Other options, such as Borrower Defense to Repayment and Closed School Discharge, may apply if your school misled you or closed while you were enrolled. …

Consider Refinancing or Deferment/Forbearance

Refinancing student loans with a private lender can lower your interest rate and monthly payments, but it also means losing access to federal benefits like IDR plans and forgiveness options.

Deferment and forbearance let you temporarily pause or reduce payments during financial hardship, but interest may continue to accrue, increasing the overall cost of your loans.

Married borrowers may also consider sequencing strategies that involve alternating between filing jointly and separately over multiple years to maximize student loan payment savings while reducing the tax cost of filing separately.

The idea behind these strategies is that your income-driven repayment plan monthly payment amount is based on your most recently filed tax return. By strategically timing your MFJ and MFS filings, you may “lock in” a lower monthly payment amount for a longer period.

For example, a couple might:

1. File taxes as MFS in Year 1 to get a lower monthly student loan payment under SAVE.

2. Continue with the lower payment based on Year 1’s MFS filing in Year 2.

3. File taxes as MFJ in Year 3 to benefit from tax benefits and credits.

4. File taxes as MFS again in Year 4 before the IDR plan recertification deadline to secure a lower monthly payment for the next year.

Consider the potential tax costs and other implications of alternating filing statuses, such as the impact on long-term financial planning and the precise timing required to optimize the strategy.

Amending Tax Returns from MFS to MFJ

Married borrowers who first file their taxes as MFS can later amend their return to MFJ if they determine that filing jointly is more beneficial. This can be done by filing Form 1040-X, Amended U.S. Individual Income Tax Return, within three years from filing the original return or within two years from the date the tax was paid, whichever is later.

When completing Form 1040-X, borrowers must explain the change in filing status, such as a misunderstanding of the implications or a change in financial circumstances. This ability to change the filing status is supported by IRS Regulation 1.6013-2(a)(1), which allows for such changes within the specified time limits.

While filing taxes as Married Filing Separately can lower student loan payments under the SAVE plan, it’s important to understand the potential risks and drawbacks compared to filing jointly.

1. Loss of Valuable Tax Credits and Deductions. As mentioned earlier, MFS filers may lose eligibility for several important tax credits and deductions, such as the Earned Income Tax Credit, education credits, and the Student Loan Interest Deduction. This can significantly affect a couple’s overall tax liability.

2. Higher Tax Rates and Reduced Deductions. MFS often results in higher tax rates because the tax brackets are generally half those of Married Filing Jointly. Additionally, certain deductions, such as the student loan interest deduction, are unavailable to MFS filers, which can lead to a higher taxable income.

3. Limitations on IRA Contributions. The income phase-out ranges for IRA deductions are much lower for MFS filers, which can limit the ability to contribute to IRAs and reduce taxable income through retirement savings.

4. Complications in Community Property States. In community property states, income and deductions must be divided equally between spouses when filing separately. This can complicate the tax filing process and potentially negate some benefits of filing separately.

5. Responsibility for Individual Tax Liabilities. When filing separately, each spouse is solely responsible for ensuring their tax return is correct and for paying any taxes due. This can be a disadvantage if one spouse is less knowledgeable about tax matters.

Before deciding to file separately, married borrowers should carefully weigh these potential drawbacks against the benefits of lower student loan payments under the SAVE plan.

Sometimes, the tax disadvantages may outweigh the student loan repayment benefits, particularly if student loan forgiveness is not a primary goal.

Deciding whether to file taxes as Married Filing Separately to lower student loan payments under the SAVE plan can be a complex decision with far-reaching financial implications. Often, it may be beneficial to consult with a tax professional or financial advisor to ensure you’re making the most informed choice for your unique situation.

Consider seeking professional advice if:

1. You have a complex tax situation. If you have multiple sources of income, own a business, or have significant investments, a tax professional can help you navigate the intricacies of filing separately and understand the potential effect on your overall tax liability.

2. You’re unsure about the trade-offs. A financial advisor can help you weigh the potential benefits of lower student loan payments against the drawbacks of filing separately, such as higher tax rates and the loss of valuable credits and deductions. They can provide personalized advice based on your specific financial goals and circumstances.

3. You’re in a community property state. The rules for assigning income and deductions when filing separately in community property states can be complicated. A tax professional can ensure you’re following the correct procedures and help you avoid potential pitfalls.

4. You have concerns about your spouse’s tax situation. If you’re considering filing separately due to concerns about your spouse’s tax liabilities or potential inaccuracies on their return, consult with a tax attorney or advisor to understand your options and protect your financial interests.

The current student loan repayment system can create a “marriage penalty” where couples may face higher tax liabilities or student loan payments simply because they are married. This complexity can lead to added stress and financial strain for married borrowers, who must carefully weigh each filing option and potentially sacrifice certain tax benefits to lower their student loan payments.

Proposed reforms to simplify the repayment process for married borrowers include:

1. Letting married borrowers file jointly while basing their IDR payments on individual incomes

2. Increasing the income protection allowance for married borrowers

3. Providing clear, easy-to-understand guidance and tools to help married borrowers make informed decisions

Married borrowers frustrated with the current system can advocate for change by contacting their elected representatives, sharing their experiences, and participating in public comment periods when the Department of Education proposes changes to student loan repayment regulations.

Despite the challenges posed by the current system, married borrowers can still take control of their financial future by making informed decisions and seeking the right support.

The intersection of student loan repayment options and tax filing strategies creates a complex landscape for married borrowers to navigate. The SAVE Plan introduces new opportunities to reduce monthly payments, but the decision to file taxes separately or jointly requires careful consideration of numerous factors and potential trade-offs.

By understanding the factors influencing your unique situation and seeking expert guidance, you can make informed decisions to minimize your student loan payments and optimize your financial well-being.

Take control of your financial future today by booking a 1:1 consultation with our team of student loan strategists. We’ll evaluate your options to get the lowest monthly payment under different scenarios.