Benefits of Filing Taxes Married Filing Separately in Community Property States

Introduction:

Marriage is a significant milestone in one's life, marking the beginning of a shared journey with a partner. While the emotional aspects of marriage are undoubtedly important, it's crucial to consider the practical implications, especially when it comes to finances. In community property states, the intertwining of financial assets can have unique consequences, particularly in the realm of student loans. In this blog post, we will explore the implications that married couples in community property states may encounter when dealing with student loans.

Understanding Community Property States:

If you are married and live in a community property state (California, Texas, Arizona, New Mexico, Louisiana, Nevada, Idaho, Washington and Wisconsin), and have student loans, you should be considering filing taxes separately. This is because community property states require you to split income on your tax return equally between spouses when filing taxes separately by filing tax form 8958.

The taxes owed between filing separately and jointly will be very similar as neither spouse will be placed into a higher tax bracket. The only exception would be if you claim certain less common tax write-offs.

If you live in one of these states and are considering going for student loan forgiveness, you could save a lot of money.

Examples for Student Loans:

If John makes $100,000 and Jane makes $50,000 and filed separately, both would show as earning $75,000. Which income should you report for your income driven repayment plan? The income that represents 50% of your joint income or your own individual income?

• If you are John, then you want to report the $75k of income from the tax return for them to calculate your income driven repayment.
• If you are Jane, then you want to use your paycheck to show that you only make $50k for them to calculate your income driven repayment.
• If you filed jointly, then the payment would be based on $150,000 of income.

Let's look at another example with a high income earner and a stay at home parent of two children. In this example, John makes $300,000 and Jane makes $0 and filed separately, you would adjust the tax return, and both would show as earning $150,000.

• If you are John, then you want to report the $150k of income from the tax return for them to calculate your income driven repayment.
• If you are Jane, then you want to show that you only make $0 for them to calculate your income driven repayment.
• If you filed jointly, then the payment would be based on $300,000 of income.

What your Tax Preparer may not understand about Married Filing Separately in a Community Property State:‍

If you ask your tax preparer what filing status to choose based on your student loan balance, they will likely have much to learn. Student loans are not taught in the CPA curriculum, and a tax professional's job is to minimize your tax burden. Filing taxes separately is usually useless for taxes, and it can often be harmful, particularly outside of community property states. Hence, tax professionals generally need help understanding these types of requests.

We work with your tax professional on strategy and implementation to make tax time easier for both of you.

Conclusion:

Navigating the complex landscape of student loans in community property states requires careful consideration and strategic planning. By understanding the intricacies of student loan management in community property states, couples can pave the way for a more secure financial future.