As yet another impact of COVID-19, many student loan borrowers have put their bills on hold. While providing relief, this will also mean that they’ll miss out on the typical tax break for payments made to student loan interest.
If you have a federal student loan, or know someone else who does, know that you might not be able to claim a popular tax deduction this time around. Approximately 12M Americans benefit from this tax deduction and lower their tax deductibility. It allows up to $2,500 a year made in interest payments towards private or federal student loans to be subtracted from their gross income.
This student loan interest deduction also doesn’t require taxes to be itemized. However, income phase-outs do apply. Individual taxpayers making more than $85K and couples who earned more than $170K in 2020 do not qualify for this tax deduction.
Normally, you can save up to $550 by claiming the deduction on line 20 of Schedule 1. Your lender is required to report your interest payments to the IRS using the 1098-E, and provide you with a copy too.
Nothing about 2020 was normal though, and tax returns are no different.
Since March of last year, the government has allowed most federal student loan borrowers the chance to pause their monthly bills without interest accruing. In addition, President Joe Biden has extended that break to September.
So, if you didn’t make any actual payments, it follows that you can’t claim a tax deduction on it.
Even if you made payments during the pandemic, you probably still won’t be able to claim the full deduction because your payment will have contributed to the principal amount of your debt, and the tax break is only for interest.
Some people will still qualify, however. This new payment pause and subsequent waiving of interest did not begin for most students until March 13th last year. This means that you may have made payments from January to March 13th that can be deducted from the gross income.
Additionally, if you owe any student loans NOT eligible for the government’s break, you may have made interest payments that can be deducted. This includes the Federal Family Education Loan Program.
How this impacts you may vary. If you or someone you know with student loans struggled during the pandemic financially, the relief not to have to pay student loans will mean more than the loss of the tax break. For others, however, this will simply result in a tax break.
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