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Income Driven Repayment Strategy in a Community Property State

January 5, 2019

Filing your taxes separately in a community property state (CA is 1 of 9 states) might be financially advantageous with a properly developed Income Driven Repayment (IDR) strategy.

 

A practical approach might be to run through an example.  Let’s assume the following about a married couple living in CA (or LA, AZ, TX, WA, ID, NV, NW or WI):

 

Spouse 1:

  • Adjusted Gross Income (AGI) = $250,000

  • Federal Student Loans = $600,000

Spouse 2:

  • Adjusted Gross Income (AGI) = $80,000

  • Federal Student Loans = $0

 

The standard approach might be to file taxes jointly resulting in an AGI = $330,000.  The PAYE payment (this strategy applies to those in IBR or PAYE, but not REPAYE) with 2 in family is $2,540/month.

 

An alternative approach is to file separately so that each spouse reports ½ the total AGI, or $165,000 AGI per spouse.  This would result in a PAYE payment of $1,165/month.  This is a saving of approximately $1,375/month or over $300,000 over the life of the loan.

 

This is because community property states attribute 50% of household income to each spouse regardless of who generated the income.  Knowing this can save you tens of thousands if not hundreds of thousands of $$$.

 

Please let me know if you have any questions.

 

Cheers,

Sergio

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