what married couples should know

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When the income cap can confuse married couples

However, there can be some grim situations for married couples based on their income.

For example, let’s say one spouse makes $150,000 but the other makes $60,000. They qualify for forgiveness based on their combined income of $210,000.

However, the higher earning spouse’s income is above the individual limit of $125,000. Is this person eligible for debt relief in addition to the lower-income spouse?

According to a White House official, the answer is yes.

To be clear, not all loans are eligible for debt relief. Examples of qualifying loans include direct Stafford loans, all directly subsidized and unsubsidized federal student loans, Parent Plus, and graduate loans. Private debts are not covered. Some debt issued through the Federal Family Education Loan (FFEL) program may also not qualify.

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Another income issue may arise for married couples. Let’s say one spouse earns $90,000 and the other earns $170,000. Their combined income of $260,000 exceeds the income limit. But would the lower-income spouse be entitled to forgiveness based on their individual income?

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As of now, the answer appears to be no, tax experts said.

“The law would say they are ineligible unless a new rule allows it [adjusted gross income] separately,” said Leon LaBrecque, a board-certified financial planner and chartered accountant based in Troy, Michigan.

The White House has not responded to a query on the matter as of press time.

Why you might not want to file an amended tax return

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Here’s a possible workaround for borrowers in this example: The couple could file an amended tax return for 2020 or 2021. They would choose to file two tax returns – as a separate marriage return – rather than one joint return. In this way, the low-income spouse would qualify based on their income.

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“A change in yield would bring forgiveness,” said LaBrecque, director of planning strategy at Sequoia Financial Group.

However, borrowers should not necessarily bother to file an amended statement, he added.

For one thing, the government has yet to release key details on specific aspects of the forgiveness plan. For example, while some borrowers may be automatically relieved, many others will have to submit an application — and that application is unlikely to be released until early October.

It is possible for the government to enact rules that allow a lower income spouse in the above example to qualify for forgiveness based on their individual income instead of joint income. This would make a possibly amended tax return unnecessary.

“I’d say wait until we hear more if you’re in that position,” LaBrecque said. “If no guidance is issued, then change [a return] will work.”

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Here is an illustration of possible state tax implications provided by LaBrecque. The analysis assumes that each spouse makes a standard deduction.

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As in the above example, in 2021, one spouse earned $90,000 and the other earned $170,000, for a combined income of $260,000. Your joint tax return would have a tax liability of approximately $44,418.

If they were to amend and file separate tax returns, the low earner would have about $12,787 in taxes and the higher earner would have $31,809 in taxes — for a total tax liability of $44,596. That exceeds the combined tax bill by just $178.

In that case, it would be worth filing an amended statement to seek forgiveness for a spouse, LaBrecque said.

However, other circumstances could easily reverse this result and negate the benefits of student loan forgiveness – meaning anyone considering changing their return should carefully consider changing filing status, he added.

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