Most student loan borrowers this year are not eligible for the usual tax break they get for paying the interest on their debt.
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Add it to the long list of 2020 changes: Your ability to claim the student loan interest deduction on your taxes.
If you’re not familiar with all the details of the deduction, here’s how it works: Those with federal or most private student loans can usually deduct from their gross income up to $ 2,500 a year in interest payments made on their loans. reducing their tax liability.
The deduction is considered “above-the-line,” meaning you don’t have to specify to be eligible for the break. There are income phasing out, and individuals who earn more than $ 85,000 and couples who earn more than $ 170,000 in 2021 are not eligible at all. Your lender is supposed to report your interest payments to the IRS on a tax form called 1098-E, and provide you with a copy. You claim the deduction on line 20 of Appendix 1.
It’s a popular break. In 2018, more than 12 million taxpayers claimed the interest deduction for student loans, according to higher education expert Mark Kantrowitz. And you can save up to $ 550 per year with it.
But this year, most people don’t qualify for a simple reason – they haven’t made any payments on their loans.
As of March 2020, the government has allowed most borrowers to press the pause button on their payments without accruing interest. President Joe Biden has extended that pause until the end of September.
“You can only claim the student loan deduction based on the amounts actually paid,” Kantrowitz said.
And because interest has been paused on most federal student loans, even if you continued to pay during the pandemic, you still can’t claim the full deduction because your money went straight to the principal of your debt. The break is only for interest payments.
Yet not all is lost. And some people still qualify.
The payment break and interest waiver for most federal student loan borrowers didn’t begin until March 13, 2020. That means you may have made payments on your loan interest for two or three months of the year that you can still deduct from your gross income .
Additionally, if you owe student loans that were not eligible for the government break, including FFEL loans or 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 break will mean little compared to the relief they have received from not having to pay their student loan. The average bill is $ 400 per month.
But for others it just means a higher tax bill.
“It’s an example of how the government gives with one hand and takes back with the other,” Kantrowitz said.
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