Most student loan borrowers will not be able to receive the usual tax reduction they get for making interest payments on their debts this year.
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Add it to the long list of changes in 2020: Your ability to claim student loan interest deduction on your taxes.
If you’re not familiar with all the details of the deduction, this is how it works: Those with federal loans or most private student loans can usually subtract up to $ 2,500 a year in interest payments they made on their loans from gross income, reducing your tax liability.
The deduction is considered “above the line”, which means that you don’t have to specify to qualify for the range. There is progressive elimination of income, and individuals earning over $ 85,000 and couples earning more than $ 170,000 in 2021 are not eligible. Your lender must report your interest payments to the IRS on a tax form called 1098-E, as well as provide you with a copy. You claim the deduction on line 20 of Annex 1.
It is a popular break. More than 12 million taxpayers claimed interest on the student loan in 2018, according to higher education expert Mark Kantrowitz. And you can save up to $ 550 a year by doing this.
But this year most people will not be eligible for a simple reason: they have not made payments on their loans.
Since March 2020, the government has allowed most borrowers to press the pause button on their payments without accruing interest. President Joe Biden extended that break until the end of September.
“You can request a deduction of interest on the student loan based only on the amounts actually paid,” said Kantrowitz.
And since interest on most federal student loans has been interrupted, even if you continued to make payments during the pandemic, you probably still won’t be able to claim the full deduction because your money is going directly to the principal of the debt. The break is only for interest payments.
Still, all is not lost. And some people will still be eligible.
The payment pause and interest exemption for most federal student loan borrowers did not begin before March 13, 2020. This means that you may have made interest payments on your loan for two or three months of the year that you can still deduct from your gross income.
In addition, if you owe student loans that are not eligible for the government range, including FFEL loans or any private loans, you may have made interest payments that can be deducted.
Of course, for those struggling during the pandemic, the loss of the tax cut will mean little compared to the relief they get from not having to repay their student loans. The average bill is $ 400 a month.
But for others, it will only mean higher tax collection.
“It is an example of how the government gives with one hand while receiving back with the other,” said Kantrowitz.
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