If you wife is fairly certain that she will remain with the practice, then she might as well pay the loans as early in the year as possible to minizime the student loan interest charged for the year.

Before paying the loans, however, you should work through a tax projection to make sure that the taxes withheld are sufficient to cover the tax liability on that income. If not enough taxes were withheld, make sure to hold back some funds to cover the taxes you'll owe next April.

The problem arises if she does leave her job, and needs to repay her employer the amount of the advance. Since you can't re-borrow your student loans, it will probably be difficult to come up with that money.

You should also be aware of the rules for repayment of income. If income is repaid the year it is received, the repayment will be net against her other income from that employer (including the bonus), and her W-2 will reflect the net numbers. This means she should be able to repay the net amount of the bonus instead of the gross amount, and your employer can make an adjustment for the taxes originally withheld on the bonus.

If you repay income in a subsequent year, the rules become a little trickier. Essentially, you will need to refigure that year's tax without the bonus, and take a tax credit for the taxes on the repaid amount on the return filed for the year you made the repayment. Basically, you'll have to wait until the following April to get back the applicable taxes on the repaid income.

Zip Code: cpa@mdtaxes.com