This is a guest post (meaning no money has been exchanged) by Joshua Thompson, CFP, EA. He is a tax professional who also runs a financial planning practice in Tampa, FL. He is married to an OBGYN and works with physician clients around the country. He created his Resident Advocate Program to earn young physician’s disability and life insurance business while performing truly valuable work on his clients’ tax and student loan situations. The Resident Advocate Program starts at a $100 base fee and includes tax preparation and student loan analysis. The cost does increase with certain tax situations.
To file taxes jointly or separately for doctors, well, it depends…
Many times one of the most confusing tax issues for doctors, especially doctors under 45 is which filing status to choose. Here are the options for everyone when it comes to filing status:
- Married filing Joint
- Married filing Separate
- Head of household
- Qualifying Widow/Widower
Choosing your filing status is not that difficult for most Americans but it is for doctors who have student loans. I am going to direct this post to physicians and physician families under 45.
- Single – This means you are not married as of 11:59pm on Dec 31st and you have no dependents. Done! This is your filing status and it doesn’t matter if you have student loans or not because you have no other options. Next!
- Head of Household – This also means you are not married as of 11:59pm on Dec 31st but you do have at least one dependent. This situation is also done as there are no other filing statuses that give you a better tax outcome that you qualify for. I mean you could file single but that doesn’t help your taxes or your student loans so that wouldn’t make any sense/cents.
- Qualifying Widow or Widower – this means you were married but your spouse died the previous year and you didn’t remarry before Dec 31st. If this is the case then this is your filing status which allows you to take advantage of the Married Filing Joint rules even though you weren’t technically married on Dec 31st.
The previous 3 options are nice and easy. There really is not a lot of thought that goes into the previous choices. Now, when we get to married couples it can get confusing, especially if one or both spouses have student loans. There is usually a best way to file for married couples with student loans but there is no good Rule of Thumb for all married couples. Each situation is truly unique and the deciding factor on which filing status is best for married couples depends on your Student loan plan, not on paying the least amount of taxes! CPA’s, EA’s (hello that’s what I am), and other tax professionals are trained to save you on your taxes, so they will not understand that your student loan plan dictates your tax filing status. Picking the wrong filing status could cost you thousands of dollars.
Young physician in training married to stay at home spouse. This situation is pretty easy. This couple will want to file Married Filing Joint. They get to take advantage of the MFJ rules and since the spouse doesn’t work then there is no increase in student loan payment, no matter which plan they are on.
Young physician in training married to working spouse (could also be a resident physician but without student loans). The physician has student loans but the spouse doesn’t. The physician makes $55,000 the spouse makes $50,000 and the physician is in IBR or PAYE and is trying for PSLF (Public Service Loan Forgiveness). If this couple files a joint tax return then they would probably save about $700- $1,500 in taxes and that would be the recommendation of the unknowing CPA, EA, HR Block rep, or the do it yourselfer using Turbo Tax. However, filing a joint tax return in this case would cost this couple an extra $7,500 if in IBR or an extra $5,000 if in PAYE. Is saving $1,000 in taxes worth paying $7,500 more if the couple wants to get PSLF? The answer is no. This couple should file their taxes as Married Filing Separate.
This couple are both residents and both make $50,000 per year. They both have student loans and are both trying to get PSLF using IBR. Let’s say that if they file a joint tax return they will save $1,100 (this is an assumption). Their total student loan bill is $11,395. If they file separate their total student loan payment is $7,800 or $3,900 each. This is because each spouse gets to deduct the family size of 2 from their income for student loan payment purposes, even when filing separately. This is a difference of $3,595 in student loan payments. Again, this couple should pay the extra $1,100 in taxes by filing separately so they can save almost $3,600 in student loans; this adds an extra $2,500 to their resident budget!
This is the same couple in Example 3 but they are both in PAYE. Again, filing a joint tax return saves them $1,100 in taxes on April 15th; however their total student loan payment is $7,600. If this couple filed separately then their total student loan payments would be $5,200 or $2,600 each. This is a savings of $2,400 of student loan payments but they paid an extra $1,100 in taxes netting them an extra $1,300 to their resident budget.
Ok, last one here. Married couple that both work. The resident physician is currently in IBR but DOESN’T want or doesn’t believe in PSLF. The resident makes $55,000 per year and the spouse makes $50,000. The resident has a loan balance of $300,000 at 6.8% interest (KISS). Filing jointly saves this couple $1,100 in taxes. If they file a joint return then the IBR payment is $12,145 for the year. If they file separate then the payment is $4,645. But, wait a sec; this doctor doesn’t want PSLF so paying more isn’t such a bad thing to make sure the loans don’t grow too much. There is another program (as long as the loans qualify) called REPAYE which could actually be a better deal even though you must use your spouse’s income no matter how you file your taxes. The REPAYE payment would be $8,100 for the year but wait, there’s more. Under REPAYE you get a 50% subsidy on the interest that isn’t paid. So if the $300,000 at 6.8% interest creates roughly $20,400 in interest and the payment is only $8,100 then this couple could get up to $6,150 in interest subsidies. So this couple should consider filing jointly, saving $1,100 in taxes but pay more in student loans to get the REPAYE subsidy. There is a lot here but if the loans all qualify for REPAYE then this could be a good option for this couple.
There are obviously other permutations of married couples with loans and each situation is unique. I covered the most common situations that I see. This post isn’t meant to give tax advice or student loan advice on its own. There are other factors that need to be addressed when it comes to a student loan plan and taxes. The first step in figuring your tax status is a thorough understanding of your student loan situation.