While filing jointly is often the most tax-advantageous option for married couples due to lower rates and broader credit eligibility, there are situations – such as one spouse having significant debt, legal issues, or defaulted student loans – where filing separately may provide important financial protection and strategic benefits.
If you’re married and live in a community property state like Texas, filing taxes separately doesn’t mean your income stands alone. Community property laws require that most income earned during the marriage be split evenly between spouses, even when filing separately. IRS Form 8958 is used to allocate income and deductions between spouses in accordance with state law. This form is especially important for borrowers re-certifying income-driven student loan repayment plans, where showing a lower adjusted gross income (AGI) can lead to significantly reduced monthly payments.
By properly using Form 8958, one spouse’s income can be partially allocated to the other, effectively lowering each individual’s AGI. This may benefit the spouse seeking to re-certify a low monthly student loan payment by reducing the reporting income used in the calculation. Likewise, if the other spouse needs to reflect higher income – for example, to qualify for favorable mortgage financing terms – accurate and legal income allocation through Form 8958 ensures both goals can be met.
Allocations are not discretionary – they must follow your state’s definition of community property. For example, in Texas, income earned during the marriage is split 50/50, regardless of whose name is on the paycheck. Income from non-community property states (like South Carolina) remains separate and is not subject to these rules. Both spouses’ returns must reflect these allocations accurately, and inconsistencies can delay processing or trigger IRS notices.
This firm helps couples navigate the complexities of community property allocation and ensure compliance with Form 8958. If you’re preparing to recertify your student loan repayment plan or need guidance on managing income allocation while filing separately, contact us to ensure your filings are accurate and optimized for your financial goals.