Written By Caitlin See
Your tax filing status can impact the amount of taxes you owe by making you eligible (or ineligible) for various tax credits and deductions. It can also affect your student loan payment, as some income-driven repayment (IDR) plans allow you to exclude spousal income if you file tax returns separately. For instance, ‘married filing separately’ can be a great student loan strategy for some, but it can come with an unintentional health insurance penalty.
Married couples filing taxes separately must navigate complex consequences, especially if they depend on the advance premium tax credit (APTC) for health insurance coverage. Here’s what to consider to maximize your eligibility for healthcare, student loans and other financial benefits.
ACA subsidies: What is the advanced premium tax credit?
The Affordable Care Act (ACA) includes a premium tax credit to help low-to-moderate-income families afford health insurance through the Health Insurance Marketplace. To be eligible for the premium tax credit, you must meet all the following requirements:
- Household income at or above 100% of the federal poverty line (FPL)
- Not being claimed as a dependent by another person
- Lack of affordable coverage through an eligible employer-sponsored plan or government program (e.g., Medicaid, Medicare, CHIP or TRICARE)
- Can’t file as married filing separately unless you qualify for a special rule (e.g., being a victim of domestic abuse).
This refundable tax credit typically applies to individuals and families with a household income of at least 100% to 400% of the federal poverty line. However, Congress temporarily expanded eligibility, allowing household incomes above 400% FPL to qualify through 2025. To qualify, they’ll have to spend more than 8.5% of their income to purchase the benchmark plan.
If you’re eligible, you can choose to receive the full benefit when you file your income tax return or as an advanced payment to reduce monthly insurance premiums. For the advanced payment, the Marketplace will estimate a credit based on your projected income for the tax year to lower your monthly insurance premiums. You’ll then reconcile the estimate with the actual credit when it comes time to file your taxes.
Does married filing separately affect health insurance?
Generally, married taxpayers must file a joint federal income tax return for the same year they want Marketplace coverage to be eligible for a premium tax credit and other savings. But exceptions exist for the following filing statuses:
- Married filing separately. If you’re living apart from your spouse when you file and are a victim of domestic abuse or spousal abandonment, you don’t have to file jointly and can still qualify for the premium tax credit.
- Head of household. If you’re married and plan to file as head of household and meet other criteria, such as living separately from your spouse, you might still be eligible for the premium tax credit.
Note there isn’t a legit health insurance penalty for filing separate returns. It just makes you ineligible for APTC and other savings unless you qualify for an exception. That said, you can still enroll in a Marketplace plan together if you file taxes separately.
Related: Seniors & Student Loans: What You Need to Know About Medicare
What student loan borrowers should know about married filing separately
Federal student loan borrowers can take advantage of income-driven repayment (IDR) options that come with low monthly payments and loan forgiveness opportunities. Under an IDR plan, payments are based on a percentage of discretionary income, which is determined by the adjusted gross income (AGI) listed on your latest tax return and your family size.
For married borrowers, the U.S. Department of Education uses combined household income to calculate payments. However, some IDR plans, like the Saving on a Valuable Education (SAVE) plan, allow borrowers to exclude spousal income if taxes are filed separately.
Despite potential student loan savings, married couples filing separately could get hit with unintended consequences, such as losing access to certain tax deductions and credits (e.g., the child and dependent care credit and education tax credits). This student loan strategy can also result in losing thousands of dollars of ACA tax credits and subsidies.
If you have healthcare coverage through your employer, you don’t need to worry about how married filing separately could create a health insurance penalty. But if you rely on subsidy assistance for healthcare coverage, weigh the overall financial implications before choosing your filing status.
Example scenario: The risk of losing ACA advanced premium tax credits
Filing your taxes separately can be particularly risky for moderate-income families who could lose valuable financial assistance, resulting in higher health insurance costs.
To illustrate, let’s look at a family where both spouses will earn a combined income of $80,000 in 2024 while raising three little ones.
Based on their family size, their income is around 228% of the poverty line, resulting in an estimated advanced premium tax credit of $1,496 per month. That’s a total of $17,954 of financial help to pay for healthcare coverage from the Marketplace.
Now, what happens if that same couple has a household income that rises to $120,000? They could still receive an estimated $12,000 premium tax credit, covering $1,000 per month of the cost of Marketplace healthcare insurance.
But let’s bump their household income up to $160,000, putting them at 455% of the poverty line. They could still qualify for ACA tax credits and subsidies through 2025 (after that, subsidies aren’t available to those above 400% unless additional legislation is passed). At this income level, they could receive an estimated premium tax credit of $570 per month, totaling $6,842 for the year.
Any of these scenarios could result in a significant loss of financial help if this family needs Marketplace health coverage. In fact, it’s likely the biggest consequence of married filing separately. So, if you don’t have access to an employer-sponsored healthcare plan and need coverage through the Marketplace, there’s a serious decision to be made whether saving on student loan payments is worth losing out on significant healthcare subsidies.
Example scenario: Student loan vs. healthcare insurance savings
We know married filing separately can result in a health insurance penalty for those who need Marketplace coverage. But let’s look at some hypothetical student loan savings to compare the two.
Using our family above, let’s say each spouse earns $60,000 annually and only one spouse has student debt with outstanding graduate loans equaling $100,000.
Under the SAVE plan, their student loan payment would be $341 per month if they file a joint tax return. But if they file taxes separately, they could have a $0 student loan payment, which could save them around $4,100 for the year.
The married filing separately strategy works out great for their student loan payment. But if they need Marketplace insurance, they’d forfeit an estimated $12,000 premium tax credit (or $1,000 per month APTC) in exchange for a lower student loan payment. In this case, they will need to decide which option is best for their family.
Use our SLP Calculator to plug in your own scenario for filing taxes jointly or separately to see what your monthly payment savings would be. You can then compare potential ACA tax credit and subsidy savings to determine the best route. Or reach out to us, and our team of expert financial planners will guide you through this important decision.
Avoiding the married filing separately health insurance penalty with alternative strategies
If you get healthcare coverage through your employer (or your spouse’s workplace), then you don’t need to factor in whether you’ll miss out on ACA premium tax credits and subsidies by filing taxes separately. But if you rely on the APTC to afford Marketplace coverage, you should probably file a joint return to avoid forfeiting valuable subsidies and consider implementing other strategies to lower your taxable income, such as:
- Increasing pre-tax retirement contributions to your 401k, 403b, Traditional IRA, etc.
- Taking advantage of the maximum contribution limit for your flexible spending account (FSA) or health savings account (HSA).
- Claiming the student loan interest deduction if eligible.
Keep in mind your student loan payment is based on your discretionary income. Therefore, lowering your taxable income also reduces your student loan payments.
Balancing taxes, student loan payments and healthcare savings
By considering the risks of filing taxes separately and exploring alternative income-reducing strategies, married couples can make informed decisions to maximize eligibility for the advanced premium tax credit and other savings.
If you find yourself in the position of deciding between cheaper student loan payments versus losing healthcare subsidies, our team can help. SLP Wealth works to put you in the best position financially when it comes to student loan repayment, tax planning, retirement savings and more. Reach out to our team of financial planners today!
