There usually aren’t many scenarios where Married Filing Separately benefits either spouse.
A scenario in which Married Filing Separately tends to be applied is when a couple has decided to live separately.
Student Loans and Income
But another one has become more prominent, due to the profound impact it can have on debt management: The intersection of student loans with income.
Married Filing Separately allows the filer to consider income-based repayment.
It also buffers their spouse from any implications that may result if the loans go into default.
For paying off student loans, establishing income based repayment is easily established by Married Filing Separately.
Other Benefits
The other benefit of Married Filing Separately is when student loans are involved is if they are federal student loans.
Since federal student loans can be forgiven if an individual goes into public service, the benefit is greater.
This is due to being able to take advantage of the Federal Student Loan Forgiveness program.
However, it’s important to know what benefits of Married Filing Jointly would diminish the benefit of Married Filing Separately.
It Impacts Two
A significant one is the Student Loan Interest Deduction.
Another one is the filer’s loans might get paid off faster if an income based repayment is formulated by the filer’s overall gross income.
This is because the repayment amount will be higher due to a higher gross income, hence paying off the balance sooner in the long run.
This saves the filer significant money in interest payments.
So, Married Filing Separately is a benefit if you are looking to optimize the lowest monthly payment.
But the offset is a longer time-frame for paying off balance and more interest paid through time.
But, it would allow for other goals to start earlier due to more cash flow available. Examples are contributing to retirement accounts or buying a home.
Inversely, Married Filing Jointly increases the monthly payment, requiring more cash flow through the course of repayment, but less overall interest is paid due to shorter time frame. Because less funds are available as a result, contributing to retirement accounts or buying a home will take longer to gain traction.
At the end of the day, each couple needs to determine which path is optimal for them by considering their overall financial picture and financial goals.
Next Step
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