In yet another case study on why student loans in America are ridiculously complex, I’ve received a bunch of questions about going for the Public Service Loan Forgiveness (PSLF) program regarding PSLF tax implications for married couples living in a community property state.
In case you don’t know what that is, certain states in the USA use something called community property law to regulate marriage income taxes and assets. These states are California, Texas, Arizona, New Mexico, Louisiana, Nevada, Idaho, Washington, and Wisconsin. If you live in one of those states and are thinking about going for student loan forgiveness, this applies to you.
The main issue with community property states and loan forgiveness is how to minimize your payments. When married federal student loan borrowers have to split your income equally on your tax returns, this creates all kinds of questions. I’ll try to address a bunch of them for you here.
What Does Living in a Community Property State Mean for Student Loans?
If you look at a geographic map of these states, they’re mostly all in the Western or Southwestern US except for Wisconsin. To drop a knowledge bomb, those states used to be part of Mexico before the Mexican American war around 1848. When those states transferred to US ownership by force, much of the Spanish influenced civil law from Mexico stayed in place.
While each state has different rules, generally you must split income on your tax return equally between spouses. For example, if two spouses make $60,000 and $40,000, you would make an adjustment on the tax return and both would show as earning $50,000.
That sounds like not that big of a deal, but what if you pay your student loans based on your income as most people do? Then it gets messy.
If you filed separately in a community property state to avoid including your spouse’s income, it might work out great if you’re the higher earning spouse because you could get a lower payment. However, if you’re a lower-earning spouse, you could be left with a higher payment.
Filing Taxes Separately For PSLF Tax Implications for Married Couples in a Non-Community Property State
Let’s look at a situation where a Physician (Sarah) is married to a teacher (Dwayne) with no student loans. We’ll assume they live in Florida, which is not a community property state. The physician owes $400,000 of student loans at a 7% interest rate. She has five years of credit towards the PSLF program.
If Sarah the physician files jointly with her teacher spouse Dwayne, who earns $50,000 a year, then she can use PAYE or REPAYE filing jointly. Both will result in the same monthly payment of $2,294 a month.
If she files separately, then Sarah’s payment on PAYE would be $1,932 according to my calculations. That difference is about $362 a month. An inexperienced person might look at that payment difference and conclude, “we should file separately to get a lower monthly payment!”
However, in non-community property states, which is most of the country, you’d pay more in taxes by filing separately if you have a big income difference.
Theses calculations are my own based on the new tax rates from the Tax Cuts and Jobs Act. The new tax rates are a little less punishing to filing separately than they used to be.
In this case, Sarah and Dwayne would pay $8,579 for filing taxes separately. This happens because Sarah gets put into the 35% tax bracket while filing separately but would only be in the 24% bracket if she filed jointly. That higher bracket creates an additional tax liability.
This difference monthly works out to about $715 a month. The tax penalty would, therefore, be higher than the $362 a month they’d gain by filing separately.
What if Dwayne was the one with $400,000 of student loans? Then the monthly payment on PAYE would be $265 a month and the savings would be close to $2,000 a month in monthly payments. Filing separately would cost them but the net savings would be about $1,300 a month.
Filing separately if you’re going for student loan forgiveness in community property states is a case by case decision.
Tax Implications of Filing Separately in the Community Property States
Recall that the only reason to file separately when you have student loans is to exclude your spouse’s income from your income-based repayment amount. When you’re in a community property state, your AGI is going to be split evenly for the most part.
That means the cost of filing separately and filing jointly will be very similar as neither spouse will get placed into a higher tax bracket.
If Sarah and Dwayne lived in Phoenix, Arizona, they’d be subject to community property rules. Hence even if they filed separately they would still be subject to an even division of income on their returns. Here’s what their taxes would look like under the different scenarios.
I’d project that the difference in tax payments between filing jointly and separately would be minimal. If you file jointly, then you must include your spouse’s income. If you file separately, you can exclude your spouse’s income.
For example, if they were able to file separately under PAYE, then Sarah’s payment would be $1,098 a month. Compared to the filing jointly payment under PAYE or REPAYE, that’s a difference of $14,352 annually between filing separately and jointly.
Since Sarah is the higher earner and she’s going for tax free loan forgiveness, this result would be great because she’d be paying way less towards the cost of this program and would be generating a massive amount of savings over 5 years.
However, if Dwayne was the one with the student debt, they’d be hit with a higher payment filing separately than they would if they lived in a non-community property state.
Can You Use Paystubs or Alternate Documentation of Income to Get a Better Student Loan Payment?
The answer is maybe. Here are the three acceptable ways to verify your income with a loan servicer if you’re on an income-driven repayment option:
- Your Tax Return Showing Your AGI
- Recent Paystubs
- Alternative Income Documentation, such as a letter testifying to your income
Effectively, you’ll have a very hard time using the number three option. The only time I’ve heard it used successfully was with a doctor who had a practice that had a lot of losses within the business that they hadn’t realized yet.
Your plan should be to use your tax return or your paystubs. Since you can use either one, I’d suggest using the more advantageous one for your situation, which will almost always be the tax return since that’s defendable as an accurate representation of your income.
Married Couples Who Both Have Student Loans Have it Easier in a Community Property State
The decision is less complicated for filing status if you both have student loans. I have yet to meet a couple who both have huge student loans from a professional program who obtain a big benefit from filing taxes separately.
The government takes your joint income into account if you file jointly and applies the payment proportionately based on your debt amount. If you have a big balance, then the government will automatically split the payment for you.
Since your payment would effectively be pretty much the same if you both have student loans regardless of filing status, I’d suggest that you file jointly and keep your life simple if you both have federal student loans.
Keep in mind that private student loans as far as the federal government is concerned is basically the same thing as having no student loans in terms of income-based repayment.
If Only One Spouse Has Student Debt, Consider Filing Separately for Your Student Loans in Community Property States
If you’re going for PSLF and you’re the only one in your marriage with student loans, then you could benefit by filing separately and choosing the Pay As You Earn (PAYE) option. This would allow your payments to be lower, resulting in a higher forgiven balance.
Many borrowers who took out loans before October 2007 are not eligible for PAYE and only can choose between IBR and REPAYE. IBR requires 15% of your income and allows filing separately while REPAYE requires 10% and does not allow you to file separately.
That means you want to run the numbers and figure out if it makes sense to do IBR based on your higher payment percentage and file separately or if REPAYE makes more sense so you can file jointly.
I must caution there are other things you miss out on when you file separately that are outside the scope of this blog post. Its important to consult your CPA about the cost of filing under each scenario.
What to Ask a CPA in a Community Property State
For clients that hire us to do a student loan consult, I’d love to get the cost of filing separately vs filing jointly from your CPA. This is very easy for them to do generally with a simple toggle button between joint and separate and shouldn’t require a bunch of work.
If you ask about what filing status you should choose based on your student loan balance, he or she is going to look at you like you have eight eyes in most cases. Student loans are not taught in CPA curriculum or even in the CFP curriculum for that matter.
If your student loans perplex you, this site and our consult service are the right venue to ask the questions about what tax filing status you would consider based on your loan balance. We’re not CPAs, but we’ll give you all the questions you need to ask the CPA to determine the ultimate cost of all the various options.
Loan Servicers Will Be Clueless About this Distinction
Keep in mind that student loan servicers can barely explain the difference between the various income-driven repayment plans out there. They will hand out blanket statements like “Go with REPAYE!” that don’t stand up to any scrutiny.
In fairness, I wouldn’t want their job in a million years. The phone reps get paid a low amount to answer questions from borrowers like you and the desire to get you off the phone if you ask them a tough question or to give you inaccurate info makes sense based on human nature.
How the Tax Cuts and Jobs Act (TCJA) Might’ve Made Filing Separately Easier
The Republicans completely overhauled the tax code in December 2017. Most taxpayers will have no idea what the impact is on them until they file in April 2019.
When you file separately, you have to use the same rules for itemizing or taking the standard deduction. There also isn’t a personal exemption anymore. Basically, the tax code for W-2 employees got a lot simpler.
That means filing separately in community property states might be simpler as more taxpayers will take the $24,000 marital standard deduction rather than go to the trouble of itemizing.
The $10,000 limit on deducting state and local income and property taxes will throw cold ice water on many households’ efforts to itemize.
Figure Out Your Best Tax Filing Status for Your Student Loans
Now that you know the PSLF tax implications for married couples, you still might have some questions about your student loans. If you’re confused about your student debt, then we can help with our flat fee student loan consult. You’ll understand all your options and all the questions you should be asking, many you probably didn’t even know about. Just hit that contact button in the bottom right.
If you have experience with filing separately to get a lower student loan payment, whether in a community property state or not, let us know in the comments.
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This is a very helpful article. I do have one additional wrench to throw in. My hubby is the one with the student loan…currently… I make slightly more money than he does, but I also officiate volleyball and have a lot of 1099’s that I will have to own money for. I am currently a student and will max out for the 8863 tax return for student tuition. That money would help cut down on what I would have to pay in. If my hubby and I file married joint, his payment will increase about $200, but if we file married separate, I cant do the 8863 for tuition. What should we do?
Depends what kind of state you live in Alexis. Our calculator is a helpful starting point. studentloanplanner.com/free-student-loan-calculator/
This is a very helpful article. We currently live in a non-community property state; I have significant student loan debt and am trying for PSLF under PAYE. My soon to be spouse has no debt and earns almost 3x my salary. We had planned to move to a community property state at some point in the future, looks like that may be delayed until post PSLF. Keep up the good work
You can do alternative documentation of income if you live in a community property state and your spouse earns more. that would allow you to pay based on your much lower income instead of 50/50
Hi Travis! Thanks so much for all the helpful info. This situation you described is ours exactly. My husband has student debt from law school, we live in a community property state (TX), and we file married but separate. His monthly loan payment has increased significantly since I make more then him. He has tried calling his student loan processing company (Nelnet) and was told tax returns were the only acceptable income documentation – are you certain that there should be alternative forms of income documentation? Or is this subject to the loan processors discretion? Any advice is much appreciated….
Technically the loan servicers have wide discretion but alternative documentation of income is acceptable proof for IDR plans. I would just call and say your latest tax return isn’t an accurate reflection of your earnings anymore and request to use alternative documentation of income, and they’re supposed to accept it.
Update! It worked! His monthly payment was reduced by$200. Thanks again for all of your help!!
That’s great to hear Steph!
I’m currently on REPAYE and going for PSLF. My partner makes about 20% more money than I do, and we live in a community property state (he has a very small student loan balance and is not eligible for PSLF). If we get married, it seems that the best option for me is to switch to PAYE and for us to file taxes separately. I realize that this means that (1) being in a community property state, my payments will still go up, and (2) the unpaid interest on my loans will capitalize when I leave REPAYE For PAYE. Since I’m going for PSLF, does that capitalization really matter? Or is there something else I’m missing here?
No capitalization doesnt matter at all. You could look at doing alternative documentation of income instead of tax returns if you believe your tax return doesnt reflect your true income.
Hi Travis,
Thank you for your article. Unfortunately I’m still struggling to understand how/if using paystubs to verify income might work when married filing jointly in a community property state. If only person has the debt and they make 90% less than the other, can they still use this method?
Thanks for clarifying your article!
Yes it’s called alternative documentation of income. You just have to claim that your tax return isn’t an accurate reflection of your income then send in proof of all income sources. Most people in community property states that dont have investment income just use paystubs.
In a similar situation as OP JEssamine. What is the best way to “claim that your tax return isn’t an accurate reflection of your income”? Is it talking to the service rep/supervisor? Or is there a certain checkbox that should be filled out in the re-certification form to force them to re-certify using pay stubs?
You just have to check the box that your tax return isn’t an accurate reflection of income on the IDR recertification. Then they’ll usually ask for proof of all income sources, usually paystubs.
I am in a community property state considering filing MFS. The spouse with higher student loan debt and a lower income is on track for PSLF. There is not a check box to indicate my tax return isn’t an accurate reflection of income on the IDR annual recertification from Nelnet. Instead, in Section 4D, question 17 asks, “Has your income significantly decreased since you filed your last federal income tax return?” If I answer “yes,” the form prompts me to go to question 18 that asks, “Do you currently have taxable income?” Answering “yes” for this question prompts me to provide documentation of income using a pay stub. This seems to be the only way to document income using a pay stub unless I indicate I am unable to reasonably access my spouse’s income information (which isn’t true).
That’s what I’d do for now but the paper form shows specifically a spot to submit alternative documentation
In a recent post you had mentioned that there could potentially be a concern about answering the question NO about having reasonable access to a spouse’s tax return. Every loan servicer has said to answer No and to submit a pay stub. How does Student Loan Planner now weigh in on this particular issues?
Someone recently told me that the Dept of Ed told Navient to stop doing that, which confused the Navient rep into saying that you could never exclude your spouse’s income by filing taxes separately, which isn’t true. So we still believe that it’s mostly FedLoan Servicing that is structurally telling people to do someone that could be fraudulent.
My wife and I just got married in June 2019 and live in a community property state. I make approximately $100k and she made approximately $60k in 2019. Our AGI are approximately $94k and $55k, making our total AGI about $149k. Since we are in a community property state, will they subtract the 150% poverty level of about $25k from this total AGI and then split that into two, leaving each of us with approximately $62k in “disposable income?” We assume that we should file jointly since we are both on PSLF plans. Does this sound reasonable or am I missing something with the subtraction of the 150% poverty level?
You can file jointly if you’re both in PSLF that’s the easiest path
I make approx $250k/year and she makes $80k/year. She has about $220K in student loan and works for a qualifying non-profit org, so she is taking advantage of the Student Loan Forgiveness Program and Pay As You Earn program. Her monthly payment is about $1,900/month. Jokingly, but somewhat seriously, we were wondering if we should get a “paper divorce” to lower her payments down to $500. Would it be legal? It’s be ~$150k in savings over the next 10 years!
Probably would be legal but instead you need to consider filing taxes separately as it might save you about $15,000 a year. Get a plan with us on this studentloanplanner.com/help you’re clearly paying more than you need to.
Can you file married filing jointly in a community property stare and then also submit alternative documentation of the lower earning spouse’s paystubs? Is there any way to submit alternative documentation without representing that you do not have reasonable access to the spouse’s tax return?
The only way is to file separately then use alternative documentation with paystubs. You can’t use it if you do married filing jointly.
So I am the spouse with student loans on a IDR plan .student loans of 48,000 and no degree. 🙁 We just got married last year. My husband made about 65k
And I made 8k .
We have children and live in a community state .
If I file separately they take away the earned income credit.
Is there a way to file jointly and not have his income with mine ?
You can do something called amending tax returns. File separately and use alternative documentation of income, meaning submit paystubs. After your return is 2 years old, have a tax person amend it from separate to joint. Then you should get the EITC back as a refund.
Travis, thank you so much for the informative article. I’m still having a little trouble understanding the implications of filing separately. We live in a community property state (Texas), I owe $62,000 in student loans and she has $0. We have two children and I earn roughly $10k/yr more than she does. I’m currently on PAYE and pursuing PSLF. Should we plan on filing separately then send in my alternative documentation of income or should we file jointly since I make slightly higher income than she does?
Thanks for your help.
You should file separately and use form 8958 to equally distribute your income, and your student loan payment should be much lower than if you filed jointly. You dont need to send in alt documentation. I’d listen to the Student Loan Planner podcast episode 6 for a detailed account of how this works https://www.studentloanplanner.com/breadwinner-loophole-dr-quinn-interview/
We attempted this and they asked for alternative documentation to show who makes what. Seems they’ve caught on to the loophole and are trying to shut it down
That’s interesting Fedloan asked that? I haven’t heard that to be widespread yet.
Yep! It asked for the most recent pay stubs for me and my spouse or a letter from both employers stating how much is made and how often it is paid.
My wife has 400k in loans, makes 60k as a resident, and I have no loans and make 150k. We live in a community property state. Additionally, I have a 50k AMT from ISO exercise this year. I assume we should file separately, she should use pay stubs to verify her income, and we’re all good?
Is there any risk in using the alternate payment documentation? Do capital gains realized through my ISO exercise and sale affect her income, or can I claim them all on my returns? I was awarded the ISOs before we got married, if that makes a difference. Thanks!
ISOs are pretty complicated so you’d want to work w a CPA who has experience in dealing with them. Correct in that youd file separately w Form 8958 and then use paystubs to verify. There might be some limited risk but it’s a risk that we’re comfortable with advising clients to take. Yes your capital gains would probably impact her income if it’s all realized this year bc you split all income evenly. but it shouldnt show up on her return because you’re claiming alternative documentation of income because you’re saying all that income is not really hers.
In this case, couldn’t a married couple file jointly and still use paystubs/alternative documentation to calculate IBR payments? Seems like you could use the same rationale that your married, jointly filed tax return does not accurately reflect your income — is there a reason why you would need to file separately in order to file alternative documentation?
Yeah based on the definition you need to file separately to do it legally.
I recently tried doing this and it did not go in my favor. I make roughly $130K and my spouse makes $45K. We filed taxes married separately to take advantage of the community property state and get a lower monthly payment for my $200K in student loans while I pursue PSLF. When I filed the paperwork to have my payment recalculated, it had my spouse sign and both of us submit our most recent tax return (married filing separate), it got bounced back and asked for us to show our pay stubs and differentiate who makes what. Seems like they’ve caught on and this loophole won’t work anymore. The only way I could see maybe getting around this is checking the box that I can’t access my spouse’s income information?
I’d be curious if others are experiencing this. One thing I’ll say is I’ve seen this happen a lot for folks using 2018 taxes but haven’t seen it yet in this case for people using 2019 taxes.
Also haven’t seen it for folks using form 8958 to equally divide income like a CPA would, so curious if that got kicked back for that reason bc maybe something was filled out not perfectly or if it’s just that they’re catching on.
Yep! Our CPA filled out all the appropriate forms. The only way we could get them to not ask for proof of who makes what is checking the box that says can’t access income info, which in part is true as we keep finances separate and just send to the CPA for returns. This is the first time we’ve done married filing separate to try and take advantage of the loophole.
Thank you for this article. The information is fantastic and the practical advice in the comments are very helpful. Thank you!!
My question is: Is there anything you can do in a community property state to get your income AND your pre-tax retirement contributions to be considered when determining how much your IBR will be? An example to illustrate the situation may be helpful. Example: 1 spouse with $150,000 income and $0 student debt and one spouse who is a resident making $50,000 and $300,000 in student loan debt going for PSLF. If they live in a non-community property state they can file separately and the resident spouse could contribute 19,000 to a traditional 401k, 6000 to a traditional ira and 3500 to an HSA bringing their AGI to 21,500. Making income based repayments on a 21,500 will be a small amount…which is the goal, yay. However, in a community property state this couple would file separately but each spouse would be considered a 100,000 AGI. I (now) understand you can submit pay stubs to get your income based repayment(IBR) plan to reflect the actual residents salary. For this couple, the resident would submit their pay stubs and (hopefully) Fed Loan would recognize their AGI is 50,000 instead of 100,000. But, my question is: Is there anything you can do in a community property state to get your income AND your pre-tax retirement contributions to be considered when determining how much your IBR will be? It is great that you can get your IBR to reflect your actual, lower income. But, it seems to me that those in community property states are still missing out on opportunities to optimize the income based repayment strategies when going for PSLF.
Is there a way, in a community property state, to get the true salary and the pre-tax contributions considered as my true AGI and thus, the basis for my IBR?
I appreciate all you do for the student borrower community! Thank you
If the spouse making less files separately he or she will have to use paystubs which will not consider AGI reduction from 401ks. So you’d only get the benefit w the higher income spouse who would use tax returns.
Great article! We recently moved to a community property state. I earn $100,000 and have $100,000 in student debt; husband earns $395,000 and no longer has any student loan debt. We have always filed separately because I made between $56-70K a year until recently.
I thought I was 16 months away from PSLF and now it looks like I am 4 YEARS away – apparently I was under the ‘wrong’ repayment plan although I recall speaking to a loan rep several times to make sure I was in the right plan years ago.
This will be our first year filing taxes in a community property state. This article seems to suggest we file separately and I use paystubs for income re-certification with FedLoans. I am currently under the IBR repayment plan. Will this work?
We go through this exercise every year – whether to file jointly or separately – but end up filing separately since we both brought in some different debt and assets at the beginning of our marriage.
If you filed separately in a community property state, it might work out great if you’re the higher earning spouse because you could get a lower payment. However, if you’re a lower-earning spouse, you could be left with a higher payment. It’s best to run the numbers with our student loan calculator to see – and check with a CPA to find out the advantages/disadvantages so you have the big picture to look at when making a decision.
If you are married and file jointly, can one spouse be on the standard repayment plan and the other spouse in income based repayment (one spouse works in public service)? Will they take into account the standard repayment monthly loans in calculating discretionary income or will they just take 15% of discretionary income no matter what repayment plan the non-PSLF spouse chooses? Or worse, do they force both spouses into income based repayment?
They won’t force both spouses into income-driven plans. One spouse can be on PSLF – your discretionary income is determined by the federal poverty guideline for your location and family size.