Student Loans, Married Filing Separately, and Pension Decisions

Recent Case Studies

Student Loans & How to Optimally File Taxes

I have come across this situation twice in the past month so I thought it would be worth writing about.

If you are living in a community property state: (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) there are certain rules to follow when it comes to filing your taxes.

Even if you are not in a community property state it may be worth looking into whether this strategy would apply to you, if you have student loans.

The strategy:

Most student loan payments are based off a % of your income.

The goal would be to get your income down as low as possible to pay the least amount if you are on the track for loan forgiveness.

One way to do that is to maximize your pre-tax retirement options, 401k, 403b, 457, HSAs, etc.

The other way to do it, if you are married and your spouse also has income, is to file your taxes separately.

In community property states, when you file your taxes, you split your income in half with your spouse.

For example, John is a doctor who took out student loans and is now making $300,000 income and his spouse Jill has $60,000 income. They reside in Texas, a community property state.

If they file their taxes JOINT, his student loan payment would be based on $360,000 of income. For simplicity, let’s say his student loan payment is 10% of income, so his student loan payments would be $36,000/yr.

*Note: In reality the calculation isn’t this simple, this is just for illustrative purposes

If they filed separately and because they are in a community property state John would report 50% of their joint income and Jill would also report 50% of their joint income.

John’s income would be reported as $180,000 and Jill’s income would be $180,000.

Now John’s student loan payments would be based on $180,000 of income, reducing his payments down to $18,000/yr instead of $36,000/yr - a savings of $18,000/yr.

The next calculation is to determine how much more in taxes, if any, one might owe if they filed separately vs joint. Typically the additional taxes owed are minimal compared to the savings of $18,000/yr on student loan payments.

If you are NOT in a community property state this strategy could still pay off by filing separately to reduce your income. Each state/situation may have a slight nuance so consult with a tax professional.

Evaluating a Pension Plan

Recently I looked at a pension plan which I don’t come across too often anymore.

For this situation, they had a “drop back” program where you could take up to 2 years worth of your pension up front as a lump sum, but you drop back to lower years of service, meaning your monthly pension would be reduced.

This significantly enhanced their retirement situation taking the lump sum and lower payments, assuming that money would then be invested vs spent.

This same concept can be applied to other areas, for example if you receive a lump sum of money upfront it is typically better to invest that money all at once vs dollar cost averaging into the markets, ie. taking the lump sum and putting it monthly into the market over a set period of time.

The other thing on a pension plan that you usually have to decide is how much does your beneficiary receive when you pass away.

In this situation the options were:

Spouse receives 100% of your pension but you take a lower monthly amount. Spouse receive 67% but you get a higher amount. Spouse receives 0%, and this gives you the highest amount possible.

From what I gathered, the 0% option would only work out if you lived a long time. It was the riskiest option to take if something happens to you early on and the amount of life insurance you would need to buy would be significant to cover an early death. I ruled this option out.

The 67% option was interesting because if you made it 10 years into your pension, you typically came out ahead after that point taking the higher amount. There was a risk that if something happened in the first 10 years, your spouse would be left worse off. But a small life insurance policy would mitigate that risk.

The 100% option was the safest bet and didn’t require purchasing life insurance – which could always be difficult depending on health/age at that point. But you did end up with less money if you ended up living a long life than the 67% option.

Estate Analysis

We recently did an estate analysis given the estate tax exemption, or what is commonly referred to as the “death tax”, is set to be cut in half in 2026 if Congress does nothing.

The consensus is if President Trump wins the election, we would expect that the Estate Tax exemption will stay the course at its current rate given President Trump was the one who originally put the legislation in place to double the estate tax exemption in 2017.

If VP Harris wins, given as a Senator she voted against the 2017 legislation proposed by then President Trump, it is likely we would expect the Estate tax exemption to be cut in half back to its original rate of about $7mil per individual.

Of course, the consensus could be wrong both ways.

Currently the Estate Tax exemption is $13.61million per individual or $27.22 million for a couple. This means if you pass away with an estate greater than this amount, your beneficiaries will owe tax on the amount above that amount.

It is a progressive rate that is charged starting at 18% on the first $10,000 over the limit all the way up to 40% tax on anything over $1mil passed down.

Consider: You work to make a living and can pay up to 37% tax on income earned You take that income and invest it and grow your wealth over the years If you did well on your investments and sell them, you then owe upwards of 23.8% in capital gains tax Then when you pass that down to your estate, they could owe upwards of 40%.

If your goal is to give as much money away to the government as possible then you shouldn't worry about this.

However if you'd like to keep more money for yourself and your family it would be prudent to have a plan in place in the event the Estate Tax exemption does get reduced at the end of 2025 and to enact that plan prior to it getting cut in half.

We have a partnership with an estate planning lawyer and are recommending you be proactive about strategies you could take prior to the estate tax being cut in half, if that ends up being the likely case.

Whether you are six figures in student loan debt, trying to figure out a pension, or have a significant estate, I am confident we can figure something out for you.

As always, if you have questions with anything related to money we want to be your go to firm.

Tax Policy for the Upcoming Election

President Trump and VP Harris have put out info on their tax policies that I’ve summarized below.

As mentioned above some of the policies from Trump’s legislation that were passed in 2017 are set to expire in 2026. Trump intends to extend that legislation. A summary is below:

Individual tax rates fell across the board: The top rate fell from 39.6% to 37%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% bracket was unchanged.

Standard Deduction increased from $6,500 to now $14,600 for single filers and from $13,000 to now $29,200 for married filers.

Child tax credit: increased from $1,000 to $2,000 for children under 17 Student loans/529 Plan: Previously 529 plans could only be used on higher education, this was extended to allow for funds to be used on K – 12 private educations.

Mortgage interest: The law limited mortgage interest deduction for married filing joint up to $750,000 of debt – down from $1mil of debt under the old law.

Corporate tax rate: lowered from 35% to 21%

What’s new for Trump?

Proposed making tips tax exempt. Proposed lowering corporate tax rate further from 21% to 15% Trump’s running mate, JD Vance, has suggested increasing the child tax credit from $2,000 to $5,000.

VP Harris

Harris has not released a lot of info on her tax policies; however, we have past policies she proposed when she ran for the Democratic nominee in 2020.

Current proposals: Proposed making tips tax exempt Proposed increasing child tax credit from $2,000 to $3,000 - $3,600 and for newborns increasing to $6,000

Past Proposals

Increasing the corporate tax rate from 21% to 35%

Increase qualified dividends received from investments from charging the capital gains rate (range of 0 – 23.8% depending on income) to charing the income tax rate (range of 10% to 39.6%)

Lift tax credit of $3,000 for single and $6,000 for married with income ranging from $50,000 - $100,000 in order to qualify.

4% Premium tax to help pay for Medicare for all on taxpayers earning over $100,000

Proposed a ‘transaction tax’ of .02% on every stock transaction, .01% on every bond transaction, and .002% on derivates

If more info is revealed we will update these proposals in upcoming Newsletter releases.