Photo credit: Getty Images
Tax filing and student loan repayment strategies for optometrists
Evon Mendrin, CFP,® CSLP®
Oct. 2, 2024
In a recent article, we explored planning for federal loan forgiveness using income-driven repayment (IDR) plans.
Now, let’s dive further into the important relationships between marriage, tax filing, state of residence, IDR plans and student loan forgiveness for optometrists.
Income-Driven Repayment (IDR) Plans and Tax Filing Status
Two main factors determine how IDR payments are calculated – income and family size.
Marriage can impact your payment calculation by changing both your family size and, if your spouse works, your household income. How you file your taxes plays a big part in the calculations.
Student Loan Calculations When Filing Taxes Jointly
When married and filing taxes jointly, your IDR payment calculation will include both spouses’ incomes, and both are included in the family size. If both spouses have federal student loans, there’s another step to adjust your IDR payments based on the debt load of each spouse.
Consider Jim and Pam, who recently married and filed taxes jointly. Jim is an optometrist with $275,000 of federal loans. Pam is a project manager with no debt. Which payment plan makes the most sense for Jim?
The chart below shows the projected payments and costs of Jim’s loans, highlighting in purple the most likely beneficial payment option after marriage. We can see the impact that marriage, increased income and tax filing status has on his loan payments.
Marriage and higher combined income likely push Jim out of forgiveness territory and into full repayment. The standard repayment plan appears to be the most sensible option.
Student Loan Calculations When Filing Taxes Separately
Filing taxes separately may provide other planning opportunities, depending on the incomes and loan amounts for each spouse.
You can file separately and exclude your spouse’s income from the payment calculation using the IBR, PAYE, and SAVE plans – thanks to the transition from REPAYE to SAVE*. However, it will also exclude your spouse from the family size count. This currently happens under SAVE, and will eventually work the same under IBR and PAYE.
If both spouses have loans, each one’s payments are calculated separately based on their own income and loan amounts.
Looking again at Jim and Pam, what if they opted to file taxes separately to keep Pam’s income out of the loan calculation? How does this change Jim’s loan payments?
When looking at the total cost in today’s dollars (present value), filing separately helped Jim benefit from a lower loan payment under IDR plans, potentially putting him on track for loan forgiveness.
How Filing Separately When Married Impacts Your Taxes
This decision isn’t only about student loans – your filing status impacts the amount of total taxes owed for the year. When you’re married and file separately, it can affect:
- The tax rates you pay, especially if there’s a large difference in income between the two spouses. Tax brackets are essentially cut in half for each spouse.
- Dependent Care and Adoption Credits
- Roth and Traditional IRA Contributions
- Child Tax Credit
- Dependent Care FSA contributions – split $2,500 for per spouse
- Capital Loss deduction limit – split for each spouse
- Claiming dependents
- Ability to receive a Premium Tax Credit for health insurance
- And more…
It’s possible for filing separately to create a higher total tax. It’s important to compare the savings on your student loan payment to the increase in tax – is the student loan savings higher than any extra taxes?
Other Articles to Explore
Work closely with your tax professional. It takes a combination of a student loan and tax projection to make the right decisions. Check your state’s tax laws for how it treats separate filings.
Community Property States and Their Unique Tax Rules
More opportunities arise for those living in community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Generally speaking, in these states, married couples filing separately split their income equally on tax returns, regardless of who earned it. For federal taxes, each spouse receives a separate tax return, with Form 8958 included. This can have a big impact when there’s a notable difference in incomes between spouses.
Consider Dwight and Angela, who are married and live in a community property state. Dwight is a manager in commercial plumbing earning $80,000, and Angela recently bought a successful private practice and is earning a combined $280,000. They have two children.
Initially, Angela assumes her income is much too high for IDR plans and forgiveness. If they filed taxes jointly, that certainly would be the case. How would the math work out if they filed taxes separately?
Filing separately splits their income in half ($180,000) for the loan calculation – allowing Angela to potentially benefit from a lower total cost (in present value) through loan forgiveness, as highlighted in purple.
If Dwight also had student loans, he could use his lower salary for his own IDR payments by submitting pay stubs as alternative documentation of income. Splitting income in community property states may also help to lessen the extra tax that comes from filing separately.
Additional strategies such as business tax and entity planning, pre-tax retirement contributions, and shifting deductible benefits between spouses, can further optimize the math.
Conclusion – More Opportunities Than Meet the Eye
For married optometrists, navigating the intersection of tax filing status and student loan repayment strategies can be complex. However, there are more planning opportunities than you might expect, especially in community property states.
Carefully analyze your specific situation, considering both student loan outcomes and tax implications. Changing your tax filing status and using IDR plans doesn’t make sense for everyone. Consult with a financial advisor experienced in student loans and a tax professional that understands community property laws and loan forgiveness programs.
Remember, IDR payments are based on your most recent tax return and filing status. If you’ve filed jointly, you can’t exclude your spouse’s income until the next (separate) return is filed. While you can amend a tax return from married filing separately back to married filing jointly, you cannot do the reverse. If you’ve filed an extension for your most recent tax return, review this decision carefully.
*Also keep an eye on news regarding SAVE and other IDR plans. As of writing, the SAVE plan has been put on pause due to recent court cases, and its future is uncertain.
The best approach depends on various factors, including your income, loan balance, your spouse’s income and loans, when you took out your loans, your progress towards loan forgiveness and personal values regarding debt.
By understanding these interactions, you can make better-informed decisions that align with your unique financial, personal, career and business goals.
Evon Mendrin, CFP®, CSLP® is the founder of Optometry Wealth Advisors, an independent financial planning firm serving optometrists nationwide. You can contact him at evon@optometrywealth.com, and check out The Optometry Money Podcast, helping ODs make better decisions around their money, careers and practices.
This article was created using several editorial tools, including AI, as part of the process. Human editors reviewed this content before publication.
