Why Some Student Loan Borrowers May Face Increased Taxes This Year
Student loan borrowers may see even more relief from the pandemic.
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Many people with federal student loans will not be able to claim a popular tax deduction this year.
About 12 million taxpayers take advantage of the interruption known as Student Loan Interest Deduction, which allows borrowers to deduct up to $ 2,500 per year in interest payments made on their personal or federal student loans from their gross income, reducing their tax liability.
The interest deduction on student loans is “above the line,” which means you don’t have to list your taxes to qualify. However, there are forfeited earnings, and individuals who have earned more than $ 85,000 and couples who have made more than $ 170,000 in 2020 are not eligible at all.
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Your lender should report your interest payments to the IRS on a tax form called 1098-E and provide you with a copy. You request the deduction on line 20 of Appendix 1.
For most years, this can save you up to $ 550 a year.
This year, however, it will be different.
As of March 2020, the government has given most federal loan borrowers the option to pause their monthly bills with no accrued interest. President Joe Biden has extended this hiatus to the end of September.
For many, no payments mean no tax breaks.
“You can only claim the interest deduction for student loans on the basis of the amounts actually paid,” said university expert Mark Kantrowitz.
With interest paused on most federal student loans, you will likely not be able to get the full deduction even if you continued to make payments during the Covid pandemic, 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 hiatus and interest waiver for most federal student loan borrowers didn’t begin until March 13, 2020. This means you may have made payments on the interest of your loan for two or three months a year that you can still deduct from your gross Income.
If you owe student loans that were not eligible for government break, including the Federal Family Education Loan Program or private 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 for their student loans. The average bill is $ 400 per month.
For others, this just means a higher tax burden.
“It’s an example of the government giving with one hand while taking back with the other,” said Kantrowitz.