For these taxpayers, losing the $2,500 student loan interest deduction increases their tax liability by $550
First, this article reviews the tax law differences between MFJ and MFS. Next, the three income — driven plans that calculate payments differently depending upon filing status are discussed. Using various taxpayer scenarios, this article compares the tax cost of MFS with the reduction in loan payments, using individual versus joint income under the three income — driven plans.
A couple filing MFS returns generally incur a greater tax liability than if they file an MFJ return, because of the numerous differences in the tax law between the two filing statuses. The differences include tax rates, the opportunity to claim various exclusions and credits, and lower eligibility or phaseout levels.
The usual assumption that the higher marginal rate for couples filing separately results in a greater tax liability is true in most situations. However, couples with relatively equal incomes are not significantly affected by differences in marginal rates since the MFS marginal rate shifts occur at levels equal to one — half of the MFJ Marginal Tax Rates and Bracket Shift,» below.)
The tax liability of a couple filing MFJ with $100,000 of taxable income is $13,717. The tax liability of a married individual filing separately with $50,000 of taxable income each is $6,, exactly one — half of the tax liability of the MFJ couple.
However, the tax liability of a married couple filing separately with $80,000 and $20,000 of taxable income is $13,458 and $2,206, respectively. The total tax liability of $15,664 is $1,947 greater than if the couple file MFJ. The additional tax liability results from the lower — income spouse’s not fully utilizing the 12% marginal rate and the higher — income spouse’s paying tax on a larger amount at the 22% marginal rate.
In addition to changing the way a married couple calculate their tax liability, choosing MFS affects the availability of certain credits, deductions, and exclusions. The MFS status prevents the taxpayer from taking the following credits:
Last, the article presents a few guidelines for tax advisers working with clients trying to minimize their student loan repayments through their tax filing status
- Credit for child and dependent care expenses; 5
- Earned income tax credit;
- Adoption credit; 6
- American opportunity credit and lifetime learning credit (education credits); and
- Credit for the elderly or disabled (if the taxpayers lived together at any time during the year).
Last, the article presents a few guidelines for tax advisers working with clients trying to minimize their student loan repayments through their tax filing status
- Neither can take the deduction for student loan interest or the tuition and fees deduction; and
- Neither can exclude interest income from qualified U.S. savings bonds used for higher education expenses.
Last, the article presents a few guidelines for tax advisers working with clients trying to minimize their student loan repayments through their tax filing status
- The income exclusion amount under an employer’s dependent care assistance program is limited to $2,500 ($5,000 on a joint return);
- The phaseout levels for the child tax credit, credit for other dependents, and retirement savings contributions credit are one-half of those for a joint return;
The prohibition on deducting student loan interest expense when choosing to file separately affects taxpayers with student loans and modified adjusted gross income under $170,000. 7 Higher — taxable — income taxpayers approaching the student loan phaseout range are in the 22% marginal rate.
After a couple have a child, the loss of the child care credit will increase the tax cost of MFS. The child care credit is $600 for one child ($3,000 of expenses at a 20% rate) and $1,200 for two or more children ($6,000 of expenses at a 20% rate) for couples MFJ with income in excess of $43,000.