what married couples need to know

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When the income cap can confuse married couples

However, there may be troubled situations for married couples depending on their income.

For example, say one spouse earns $150,000 but the other spouse earns $60,000. They are eligible for a rebate based on their joint income of $210,000.

However, the income of the higher-earning spouse is above the individual limit of $125,000. Is this person entitled to debt relief, in addition to the spouse who earns less?

The answer is yes, according to a White House official.

To be clear, not all loans are eligible for debt relief. Eligible loans to understand Stafford direct loans, all direct subsidized and unsubsidized federal student loans, Parent Plus and Grad loans, for example. Private debt is not covered. Certain debt issued through the Federal Family Education Loan (FFEL) program may not qualify either.

Another question of income may arise for married couples. Let’s say one spouse earns $90,000 and the other earns $170,000. Their joint income of $260,000 exceeds the income limit. But would the low-income spouse qualify for a discount based on their personal income?

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

“The law would say they are not eligible, unless a new rule allows the [adjusted gross income] to be reported separately,” said Leon LaBrecque, a certified financial planner and certified public accountant based in Troy, Michigan.

The White House did not respond to an inquiry on this point by press time.

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Here is a potential 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 – like married file separately — instead of a joint declaration. This way, the spouse with the lower income would qualify based on their income.

“Modifying the return would get forgiveness,” said LaBrecque, head of planning strategy at Sequoia Financial Group.

However, borrowers should not necessarily rush to file an amended return, he added.

For one, the government has yet to provide key details on certain aspects of the pardon plan. For example, while some borrowers may get automatic relief, many others will need to apply for it – and that application is not expected to be released until early October.

It is possible that the government will issue rules that allow a low-income spouse in the example above to qualify for a rebate based on their individual income instead of the joint income. This would make an amended tax return unnecessary, if required.

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

Here is an illustration of the potential federal tax consequences, provided by LaBrecque. The analysis assumes that each spouse takes a standard deduction.

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

If they amended and filed separate tax returns, the lower income would have tax of approximately $12,787 and the higher income would have $31,809 in tax – for a total federal tax liability of $44,596. $. This only slightly exceeds the common tax liability of $178.

In that case, it would be worth filing an amended return to get a spouse’s pardon, LaBrecque said.

But other circumstances could easily overturn that result and negate the benefits of student loan forgiveness — meaning anyone considering changing their statement should carefully consider the change in filing status, he added.

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