Late last month, the Supreme Court made a major ruling striking down portions of the Defense of Marriage Act (aka DOMA) that changed the fabric of our society. But what may not have been readily apparent is that the ruling also changed the handling of student loans for same-sex couples who are married and have educational debt. While the ruling wasn’t intended to tamper with debt, because it affects federal tax filing status, it impacts loans, bankruptcy and other financial matters.
Tax Status of Same Sex Couples
If you go to the IRS webpage: FAQs for Same Sex Couples you’ll see a disclaimer at the top of the page that spells out that the answers they provide there do not reflect the impact of the June 26th Supreme Court ruling. On that page, it says that same sex couples may not file either married filing joint or married filing separately even if their state recognizes same sex marriage.
Because the Supreme Court found in Windsor vs United States (one of the two cases involved in the DOMA ruling) that because DOMA “excluded same-sex unions from the federal definition of marriage” that is tantamount to an “unconstitutional deprivation” of the equal liberty guaranteed by the 5th amendment to the Constitution. In short, the federal government has to recognize same sex marriage or else they are violating the Constitution – according to the Supreme Court’s ruling.
This means that not only will same sex couples be able to file their tax returns as married (either filing jointly or separately) but they may be able to amend previous returns. What’s more, they will be required to file their taxes as married if they are married. The issue of state-level taxes will be more complex because some states don’t sanction gay marriage while others do and there will no doubt be more legal wrangling over that in the future. But for the purpose of our discussion today, federal status is what matters.
Same Sex Couples and Student Loans
So here’s what you need to know if this ruling applies to you. Once the IRS gets their ducks in a row, for those in a same sex marriage, married tax status will be de rigueur. This impacts your student loans in a few ways. If you are currently paying on student loans and enjoying the benefit of deducting student loan interest on your taxes, this will continue only as long as you file married filing jointly. Those who are married but file separately will not be eligible for this credit.
The recent ruling may also impact how income is determined for income sensitive student loan plans. For same sex couples struggling with student loans, this ruling represents the same double edged sword it does for other couples. If you’re hoping for lower monthly payments on an income based or pay as you earn plan, how you file is a huge factor.
If you file married filing joint, both of your incomes will be considered when determining eligibility and amount of payments. If both partners have student loans, that will factor in your favor but your income will be higher if both partners work. On the plus side, if you file under MFJ status you can deduct student loan interest.
If you opt for married filing separate, only your income will be considered for purposes of calculating eligibility and payment size for IBR, ICR or PAYE. This will increase your chances of getting a lower payment. On the downside, you won’t be able to claim student loan interest as a tax deduction so you have to look closely to consider which approach will benefit you most financially in the short as well as the long run.
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