Most borrowers will not get a tax break this year
Most student loan borrowers will not be eligible for the usual tax break this year for paying the interest on their debts.
Add it to the long list of changes in 2020: 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: Individuals on federal or most private student loans can typically deduct interest payments of up to $ 2,500 per year from their gross income, reducing their tax liability.
The deduction is considered “above the grain,” which means you don’t need to provide any information to qualify for the break. There is loss of income, and individuals earning more than $ 85,000 and couples earning more than $ 170,000 in 2021 are not eligible at all. Your lender should report your interest payments to the IRS on a tax form called 1098-E and provide you with a copy. You are requesting the deduction on line 20 of Appendix 1.
It’s a popular break. According to university expert Mark Kantrowitz, more than 12 million taxpayers applied for interest deduction on student loans in 2018. This can save you up to $ 550 a year.
But this year most people are ineligible for one simple reason: they haven’t made payments on their loans.
As of March 2020, the government has allowed most borrowers to hit the pause button on their payments without incurring interest. President Joe Biden has extended this hiatus to the end of September.
“You can only claim the interest deduction for student loans on the basis of the amounts actually paid,” said Kantrowitz.
And because interest has been suspended on most federal student loans, even if you’ve continued making payments during the pandemic, you probably won’t be able to get the full deduction, as your money goes straight to the principal of your debt. The break only applies to interest payments.
Still, all is not lost. And some people will still be eligible.
The payment pause and interest waiver for most federal borrowers did not begin until March 13, 2020. This means that you may have made payments on the interest on your loan for two or three months each year, which you can still deduct from your gross income.
If you owe student loans that were not eligible for government interruption, including FFEL loans or personal loans, you may have made interest payments that are deductible.
Of course, for those struggling during the pandemic, the loss of the tax break means little compared to the relief they received from not having to pay their student loans. The average bill is $ 400 per month.
For others, however, this only means a higher tax burden.
“It’s an example of the government giving with one hand while taking back with the other,” said Kantrowitz.
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