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: Those with federal or most private student loans are usually able to subtract up to $2,500 a year in interest payments they’ve made on their loans from their gross income, reducing their tax liability.
The deduction is considered “above-the-line,” which means you don’t need to itemize to qualify for the break. There are income phase-outs, and individuals who earn above $85,000 and couples who make 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 a 1098-E, as well as provide you with a copy. You claim the deduction on line 20 of Schedule 1.
It’s a popular break. More than 12 million taxpayers claimed the student loan interest deduction in 2018, according to higher education expert Mark Kantrowitz. And you can save up to $550 a year by doing so.
But this year most people won’t be eligible for a simple reason: They haven’t been making payments on their loans.
Since March 2020, the government has allowed most borrowers to press the pause button on their payments without interest accruing. President Joe Biden has extended that break until the end of September.
“You can claim the student loan interest deduction based only on amounts actually paid,” Kantrowitz said.
And because the interest on most federal student loans has been paused, even if you’ve continued making payments during the pandemic you likely still won’t be able to claim the full deduction because your money has been going directly to your debt’s principal. The break is only for payments to interest.
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Still, not all is lost. And some people will still be eligible.
The payment pause and interest waiver for most federal student loan borrowers didn’t begin until March 13, 2020. That means that you may have made payments to your loan’s interest 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 haven’t been eligible for the government’s break, 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 break will mean little compared to the relief they’ve gotten from not having to pay their student loans. The average bill is $400 a month.
But for others, it’ll just mean a higher tax bill.
“It is an example of how the government gives with one hand while taking back with the other,” Kantrowitz said.
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