Student Loans, Marriage, Taxes, and Community Property States - OH MY!

Call me a nerd (I am), but I love helping federal student loan borrowers determine the impact of marriage and tax filing status in a community property state on their monthly payments. It presents a unique and creative student loan planning opportunity for my fellow cheeseheads to help keep their monthly payments low. Fun fact: Wisconsin is one of only nine community property states!

When a federal student loan borrower is enrolled in one of the income-driven repayment (IDR) plans, they must supply updated income information annually to their servicer. Their servicer takes this information and recalculates their monthly payments accordingly. Borrowers will usually provide their most recent tax return (as long as they're not making less than what is reflected on the return).

For married borrowers on an IDR plan, their spouse's income and federal loan balance will be taken into account if they file their taxes as married filing jointly (MFJ). This may mean a higher monthly payment, which isn't good news if they're pursuing Public Service Loan Forgiveness (PSLF). The strategy behind PSLF is to keep the payments as low as possible to maximize the forgiveness received after 120 qualifying payments. So, can they ignore their spouse's income information? 

If they file their taxes as married filing separately, they can (kind of) ignore their spouse's income information. Ah ha! Now we're getting somewhere. But wait, how does that work in a community property state? I thought you'd never ask! 

If a borrower files taxes as married-filing-separately in a community property state, their household income is split in half using Form 8958. Both spouses must submit this form with their tax returns. The borrower then supplies this recent tax return to their student loan servicer, resulting in a lower monthly payment. Let's take a look at an example of how this plays out for the married couple below: 

• Rachel and Ross are married and live in WI (a community property state)
• Rachel makes $100,000 annually, has $120,000 in federal student loan debt, and is pursuing PSLF since she works at UW-Madison
• Ross makes $80,000 annually and has no federal student loan debt 
• If they file taxes jointly, Rachel's monthly payment would be $1,116.75 on the SAVE plan (based on $180,000 of household income)
• If they file taxes separately, her monthly payment would be $467.63 on the SAVE plan (based on $90,000 of household income) - an annual difference of $7,789.50! WOWZA!

When Rachel does their 2023 taxes, she should compare the costs of filing taxes separately to the annual savings on her student loan payments. 

Pro tip: I always recommend that my clients consult with a CPA when deciding whether to file taxes as MFS or MFJ. Though I can share the impact of tax filing status on student loan payments, I can't give tax advice since I'm not a licensed CPA.