If you’re on an Income-Driven Repayment (IDR) plan, or planning to be, there’s a little-known tax loophole that could save you $20,000โ$100,000 over the life of your student loans.
Most borrowers unknowingly overpay on their student loans simply because they arenโt aware of how their tax filing status affects their payments. But today, weโre going to change that.
In this article, youโll learn exactly how this loophole works, who it applies to, and the #1 mistake to avoid when using it.
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How the IDR Tax Loophole Works
When you’re on an IDR planโsuch as IBR, PAYE, or REPAYEโyour monthly student loan payment is calculated based on your adjusted gross income (AGI).
If youโre married and file your taxes jointly, your payment is based on your combined income, which can result in a significantly higher monthly bill. But hereโs the loophole:
Step 1: File Separately to Lower Your Payments
By filing taxes as “Married Filing Separately,” only your income (not your spouse’s) is used to calculate your IDR payment. This often results in a much lower required payment.
Step 2: Amend Later to Reclaim Your Tax Benefits
After your lower student loan payments are locked in, you can later amend your tax return to file jointly and reclaim tax benefits such as a higher standard deduction and better tax credits.
Example: How Much Could You Save?
Letโs say Sarah and James are married, and together they earn $120,000 per year. If they file jointly, their student loan payment could be $1,200 per month.
However, if Sarah files separately, her loan payment is based solely on her income of $60,000, reducing her monthly payment to $350.
By using this strategy, they save $850 per monthโover $10,000 per year on student loan payments. Then, by amending their tax return later, they get their tax refund back as if they had originally filed jointly.
Who Can Benefit from This Strategy?
This strategy isnโt just for married couples. Itโs valuable for:
- Anyone currently on an IDR plan who is married or considering marriage.
- Students who will be using IDR in the future and want to plan ahead.
- Borrowers pursuing student loan forgiveness who want to minimize payments.
If you fall into any of these categories, taking advantage of this loophole could result in massive savings.
The #1 Mistake People Make When Filing Separately
While this strategy can work wonders, thereโs one crucial mistake many people make: they forget about Roth IRA contributions.
When you file separately, your ability to contribute to a Roth IRA directly can be limited or even eliminated depending on your income. This could mean missing out on tax-free growth for your retirement.
Solution:
If you’re planning to file separately, consider a Backdoor Roth IRA conversion to ensure you’re still taking advantage of this powerful retirement savings tool.
How to Take Action
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Final Thoughts
Filing taxes the right way could be the key to unlocking massive student loan savings. Whether you’re married, planning to get married, or still in school, taking advantage of this loophole could help you keep thousands of dollars in your pocket.
Have questions? Drop them in the comments belowโIโm happy to help!
And donโt forget to share this article with anyone you know whoโs on an IDR planโhelp them avoid costly mistakes and take control of their financial future.