What is the best PSLF tax filing status for married couples?
There is no “one size fits all” answer. However, most married couples will benefit from selecting their PSLF tax filing status as “married filing separately.”
PSLF income-based payments are determined by your “adjusted gross income” (AGI). When you are married and file your taxes jointly, your AGI goes up. Thus, your total monthly payment can go up. (See my post on lowering your AGI to lower your payment!)
For reference, when I say “PSLF tax filing status,” I am not referring to an actual type of filing status. It’s merely a way to say “the tax filing status that is most beneficial to you as your pursue your PSLF goals.”
And a quick disclaimer, nothing on this site should be construed as legal or financial advice.
How do I choose the best PSLF tax filing status?
Do a few dry runs of your taxes.
Whether you are hiring someone to do your taxes or doing them yourself, your taxes need to be done at least different ways, usually more, to determine your PSLF tax filing status.
You should see what your state and federal taxes look like married filing separately and married filing jointly. You should also play with deductions and credits.
See what your taxes look like when your spouse claims the kids and the house? Just the house and you claim the kids? Etc. Just for the big ones. There are a lot of variables and you can’t do your taxes twelve different ways, but doing them four to six ways can really make a difference!
Create a spreadsheet as you go.
Set up a spreadsheet to track your data. That way you can go back, look at all the math, and make the right tax filing status decision. Here is an Excel sheet I made to help you with this task.
I don’t want to owe taxes!
No one wants to pay taxes. That’s why a group of people threw tea into the ocean before overthrowing the British Empire. And yet, here we are.
Here’s the thing, you cannot be swayed by your refund/owe amount. PSLF is a long-term program so you need to think long-term. For example, if you get $5,000 back in taxes but end up owing $8,000 more a year for student loans, you are losing $3,000 over the course of a year.
Are you getting that big refund upfront? Sure. But you would be doing so at an interest rate that even the worse loan shark would quiver at!
Besides, what matters is not what you owe or what even what your refund is. What matters is how much did you have to pay in taxes that year after all is said and done?
Combing your taxes and your PSLF eligible loans, do you end up paying more at the end of the year filing our taxes “married filing jointly” or “married filing separately”? Look at the numbers, determine what tax filing status makes the most financial sense to you, and go from there.
P.S. – You can use a tool like this to figure out your payments based on your AGI.
Won’t my tax adviser know all this?
No! That’s the scary part of all of this. You hire someone to do your taxes and expect they know all of this. In my experience, unless they are great at their jobs, they may not understand how your PSLF eligible loans will impact your tax filing status.
I cannot tell you how many times I have spoken to an experienced tax adviser and had to explain to their befuddled faces why “married filing separately” saved me thousands of dollars. Remember, when it comes to your money, don;t just blindly trust someone you hire. As we say in the business, “trust, but verify.”
So, when you go into H&R Block or Liberty tax or your parent’s tax person, make sure you educate them about the PSLF implications of your tax filing status. (Or better yet, sit down and do them yourself. You have a J.D. You can do it!).
