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Tax filing status and loan repayment options after marriage

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  •  soccers56 
    Participant
    Status: Resident, Physician
    Posts: 4
    Joined: 02/06/2019

    Hi all,

    I have some specific questions about my family regarding marriage, taxes, retirement savings, and student loan repayments. First, some background. Together, my wife and I, both physicians, have about 550k in student loans; I had started with 300k and my wife had 200k upon graduating medical school. We are both now in our 4th of 6 years of training, and have both been paying our student loans with Pay As You Earn with the expectation to pursue Public Service Loan Forgiveness. Also, we were both in residency in the same city until June 2018, but we’ve had a busy year.  We got married in May, and then in July my wife started her fellowship in the state next door so we moved to that state, while I am still working in the same prior hospital completing my residency. When we both finish our fellowships, we expect that as attendings, one of us will be expecting a low for a physician salary, while the other will be expecting a relatively average for physician salary. We both are hopeful that we will be able to complete 10 years of jobs qualifying for PSLF, but that isn’t a certainty for now.

    My first question is how we should be filing taxes this year now that we are married? If we file as married filing jointly, we will have a higher monthly PAYE payments as opposed to filing as married filing separately, but I’m wondering if the tax benefits of filing jointly will offset that. The biggest tax benefit I can see is for student loan interest deduction, but I’m not sure what other benefits there are. Also, do you have any information on which states taxes need to be filed between the two states in our situation?

    The other question I have is regarding our retirement account contributions. Neither one of us gets a match from our 403b, so we have been maxing out our Roth IRA and then putting what we can in our 403b. This past year I made Roth contributions to my 403b, but now in retrospect, I imagine that going forward, after-tax contributions as well as changing to a traditional IRA would be more beneficial to reduce our student loan payments. Any thoughts?

    In regards to our student loan payments, we are both on PAYE, and in retrospect it seems like REPAYE would have been the better choice. I am hesitant to change at this time because of the capitalization of the interest that has generated, and in case we end up not qualifying for PSLF. Does anyone have any suggestions about this?

    Thanks in advance!

    #189128 Reply
    SerrateAndDominate SerrateAndDominate 
    Participant
    Status: Physician
    Posts: 275
    Joined: 02/01/2018

    When one of you gets attending money, REPAYE won’t be as beneficial for a few reasons. You will likely pay more per month and thus get less interest subsidy. I believe REPAYE has no cap on payment amount like PAYE does. Also, if you do REPAYE, both of your incomes are included regardless of how you file taxes.

     

    You’ll probably lose your student loan deduction as well.  Since the amount of deductible interest is only $2,500 per person (unless that’s changed or I’m dead wrong), I wouldn’t weigh that part on my decision as much. PAYE is likely the way to go.

     

    FWIW, take my advice with a grain of salt given my own experience.  My wife had no loans and was a high earner. I knew I had zero interest in academics. Did the math and saw that my overall loan amount would be less through private refinancing

     

    and make sure you certify all those years of employment.  Keep that stuff updated. That seems to be one of the biggest issues people encounter

    Earn everything.

    #189256 Reply
    Liked by soccers56, ChadCFP
    ChadCFP ChadCFP 
    Participant
    Status: Financial Advisor, Website Sponsor, Small Business Owner
    Posts: 61
    Joined: 10/04/2017

    My first question is how we should be filing taxes this year now that we are married? If we file as married filing jointly, we will have a higher monthly PAYE payments as opposed to filing as married filing separately, but I’m wondering if the tax benefits of filing jointly will offset that. The biggest tax benefit I can see is for student loan interest deduction, but I’m not sure what other benefits there are. Also, do you have any information on which states taxes need to be filed between the two states in our situation?

     

    Great post, and thanks for the details.

    It is hard to give specific advice when you are in the “maybe PSLF” land. However, PAYE is the best payment plan out there, and the adage is that if you are in PAYE you shouldn’t leave PAYE (especially if going for PSLF).

    Based on your current notes, stick with PAYE and file separately until you hit 120 payments. If you want to be precise, you could look at both filings (Separately vs. Jointly) and then compare to the difference in PSLF payments. The goal is to keep the most $ in your pocket.

    For 2018, the maximum amount that you can deduct for interest paid on student loans remains $2,500. Phaseouts apply for taxpayers with MAGI in excess of $65,000 ($135,000 for joint returns) and is completely phased out for taxpayers with MAGI of $80,000 or more ($165,000 or more for joint returns).

    For 2019, the maximum amount that you can deduct for interest paid on student loans remains $2,500. Phaseouts apply for taxpayers with MAGI more than $70,000 ($140,000 for joint returns) and the deduction is completely phased out for taxpayers with MAGI of $85,000 or more ($170,000 or more for joint returns).

    For the state taxes, maybe the resident tax expert @jfoxcpacfp (not sure if I tag her correctly) can confirm, but you should be paying state income taxes where the income was earned. So I “assume” you will be paying two state income taxes unless there is some reciprocal agreement in place (we have that in Philly with the state of NJ). 

     

    The other question I have is regarding our retirement account contributions. Neither one of us gets a match from our 403b, so we have been maxing out our Roth IRA and then putting what we can in our 403b. This past year I made Roth contributions to my 403b, but now in retrospect, I imagine that going forward, after-tax contributions as well as changing to a traditional IRA would be more beneficial to reduce our student loan payments. Any thoughts?

    Click to expand…

    Our strategy has always been to max out the 403b (if you can) to lower your AGI and lower your PAYE amount. If you are able to do that that each year, then look to do the Roth IRA/Backdoor Roth IRA based on income limits.

    As a reminder, IRA contributions have a VERY low income limit to qualify for the deduction when you are eligible for a qualified employer plan. For 2019, married filing jointly is fully phased out at $121k (household MAGI) and $10k if married filing separately. This is why a traditional IRA does work for many, however, your thinking/strategy was good.

    In regards to our student loan payments, we are both on PAYE, and in retrospect it seems like REPAYE would have been the better choice. I am hesitant to change at this time because of the capitalization of the interest that has generated, and in case we end up not qualifying for PSLF. Does anyone have any suggestions about this?

    Click to expand…

    Answered above, but I can’t think of any good reason to switch to REPAYE from PAYE. The only possible benefit would be the better interest subsidy but if you are going for PSLF that doesn’t matter. And even if you decided against PSLF, you would probably stick with PAYE but start paying more to lower your interest not covered by the subsidy. This will help down the road when you have to refi and may more aggressively.

    Chad Chubb, CFP ® | WealthKeel LLC
    https://wealthkeel.com/wci | Gen X & Gen Y Physicians

    #189268 Reply
    Liked by soccers56
     soccers56 
    Participant
    Status: Resident, Physician
    Posts: 4
    Joined: 02/06/2019

    Awesome, thank you as well for the thorough reply.  Looks like I have a few takeaways from your post.

     

    We won’t be switching to REPAYE since we’re both already on PAYE, and it seems like that will be just fine for us.

    It appears that our best bet would be to file as MFS to keep our payments as low as possible, despite the fact that we will miss out on the student loan deduction.  Running some numbers in a PAYE calculator (estimating AGI of about 65k each), MFS makes our monthly payments at $391 while MFJ will have a combined monthly payment of $880. So its less than a $100 month difference, so $1068 for the year.  In contrast, the student loan tax deduction, if maxed out, would only save us ($2500 * 22%) $550 annually if filing MFJ,  All the more reason to support using MFS for our case.

    I didn’t realize that the phaseout for deductions for traditional IRA contributions is phased out at 10k for MFS, so there would be no point for us to contribute to a traditional IRA, and instead stick to a Roth / Backdoor Roth IRA.

     

    However, regarding this last point, it appears that direct Roth IRA contributions for MFS also are not allowed above a 10k MAGI. What does this mean for our Roth IRA contributions from last year?  Both my wife and I maxed out our Roth IRA contributions in 2018, but if we are going to file as MFS, then this is not allowed.  How can I address this?  Is there any way I can change it to somehow be recognized as a Backdoor Roth IRA?  If it helps, our Roth IRAs are both at Vanguard.  In addition, we both have already maxed our 2019 Roth IRA contributions, which might be an issue going forward as well. This is now my biggest concern about filing my 2018 taxes.

     

    Thanks again!  If any one else has any additional thoughts, I’m all ears.

    #189392 Reply
    ChadCFP ChadCFP 
    Participant
    Status: Financial Advisor, Website Sponsor, Small Business Owner
    Posts: 61
    Joined: 10/04/2017

    Yes, PAYE should be your best repayment plan.

    I am not sure if you use an accountant, but you need to analyze everything, not just the student loan deduction. MFJ has more attractive tax brackets (see below), the standard deduction will jump up to $24k (technically nothing unique here), more room in the Roth IRA income limits, etc.

    For example, let’s use the numbers you provided and assume you would be paying $1,200/year more with MFJ when compared to MFS ($780 MFS vs. $880 MFS). You need to run the full tax simulation to see if you save more than $1,200/year by using MFJ vs. MFS. The student loan interest deduction is just part of the equation.

    If we assume the $130k for household AGI; MFJ you fall nicely in the 22% bracket. With MFS, after $82.5k, you are now in the 24% bracket with dollars over $82.5k. Napkin math says that is couple thousand saved there alone, not including your student loan interest deduction. Here are the 2018 brackets, I used your AGI as taxable income but either way, it should be a large savings.

    I am not an accountant and you should confirm this with an accountant, but if the payments are only off by $100/m, (Which is pretty common when income is similar and loan balances are close. We see it often with our clients.) MFJ could be more attractive as of now. Which is another nice aspect of PAYE, you can choose how you want to file. REPAYE doesn’t allow that.

    For the Roth IRA issue, another benefit to MFJ. If you maxed out for 2018, you still have time to fix the issue (assuming you didn’t file already). You certainly have time to fix 2019. For 2018, see/confirm if MFJ will be a more attractive option. If so, then your Roth IRA is fine for 2018 & 2019 based on the AGI and MFJ.

    Chad Chubb, CFP ® | WealthKeel LLC
    https://wealthkeel.com/wci | Gen X & Gen Y Physicians

    #189425 Reply
    ChadCFP ChadCFP 
    Participant
    Status: Financial Advisor, Website Sponsor, Small Business Owner
    Posts: 61
    Joined: 10/04/2017

    For fun, I used the HR Block Tax Calculator and ran a VERY basic comparison using $130k income and the full $2,500 interest deduction:

    MFJ= ~$14,600 (Total Federal Taxes Due)

    MFS= ~$22,600 (Total Federal Taxes Due)

    This was the most basic form of information for a tax return (essentially only income and student loan interest), and I am not an accountant and you should confirm all my thinking with an accountant (sorry to be redundant, important for compliance but also just in case I am way off and an actual accountant calls me out lol). Moral of the story, at least look at MFJ and see if it can keep more money in your pocket and not Uncle Sam’s! Even if PAYE jumps up a little, if you save more money overall with MFJ, then that would be a victory.

    Chad Chubb, CFP ® | WealthKeel LLC
    https://wealthkeel.com/wci | Gen X & Gen Y Physicians

    #189431 Reply
     soccers56 
    Participant
    Status: Resident, Physician
    Posts: 4
    Joined: 02/06/2019
    Splash Refinancing Bonus

    Our situation would not save us nearly as much as your example if we were to file MFJ, since each of us make just about the same amount.  Both of us make around 65k as we are both in residency/fellowship, so for MFJ at 130k we are in the 22% bracket, and also for MFS where we each have 65k we are also in the 22% bracket.

    The Roth IRA issue might be a reason for us to file as MFJ this year though, despite the higher PAYE payments.

    #189492 Reply
    ChadCFP ChadCFP 
    Participant
    Status: Financial Advisor, Website Sponsor, Small Business Owner
    Posts: 61
    Joined: 10/04/2017

    You are correct, I assumed the $130k on both scenarios for apples to apples which was not correct.

    If I updated to $65k it looks like $7.6k (Federal Tax Due) for each of you or $15,200 total which turns out to be a very close wash. If that were the case, the Roth may be your deciding factor for 2018.

    My only concern would if you start to make more pretax contributions (403b and HSA), your PAYE will come down 2019+. So you may want to take advantage of MFJ for 2018 (assuming a wash) for your Roth IRAs, but then switch back to MFS if you are saving more pre-tax in 2019.

    Chad Chubb, CFP ® | WealthKeel LLC
    https://wealthkeel.com/wci | Gen X & Gen Y Physicians

    #189500 Reply
     soccers56 
    Participant
    Status: Resident, Physician
    Posts: 4
    Joined: 02/06/2019

    So you may want to take advantage of MFJ for 2018 (assuming a wash) for your Roth IRAs, but then switch back to MFS if you are saving more pre-tax in 2019.

    Click to expand…

    Perfect, that’s actually what I was thinking after mulling over the situation overnight.  I’ll do MFJ for 2018, and when it comes time for us to certify again for PAYE (which is November for me, January 2020 for my wife), we will have higher payments based on our MFJ 2018 return.  However, we can then file as MFS for 2019 and recertify early 2020 so we only have the higher payments for a few months.  The one thing that I will have to change is that we have both already maxed out our Roth IRAs for 2019 last month, but it looks like we instead have to redo those to be backdoor Roth IRAs.  That will be a slight hassel.

    Thanks again!

    #189505 Reply
    Liked by ChadCFP

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