[ad_1]
As with most types of debt, interest on student loans can make it difficult to reduce your principal balance. But unlike many other types of debt, there’s a little silver lining to student loan interest: it’s tax deductible.
Each year more than 12 million Americans get a little boost on their taxes with the student loan interest tax deduction. This is an “over the line†deduction or, in the IRS’s terms, an income adjustment, which means you don’t have to itemize your taxes to claim it. You can subtract up to $ 2,500 of interest paid each year from your taxable income.
But for the 2020 tax year, that deduction will be different for many federal student loan borrowers, who were not required to make payments for much of last year. Here is what you need to know.
How is the deduction changing for federal borrowers this year?
More than 35 million federal student loan borrowers have been on interest-free forbearance since mid-March. The value of the student loan interest deduction this year will be much smaller for most of these borrowers.
Instead of claiming the total interest paid over a 12-month period, most borrowers only paid interest for January, February, and early March, before the CARES Act set interest rates at 0%. .
Loan managers typically send borrowers a form, called 1098-E, which shows the amount of interest paid. But repairers are only required to send it if your interest totals more than $ 600. So, while you are used to automatically receiving this form every January in your mailbox or inbox, keep in mind that this year you may need to proactively request it because you have paid about a quarter of the interest you paid last year. .
Who can still get the full 2020 student loan interest deduction?
There are still a lot of people who can claim the full interest deduction this year. There are millions of borrowers with private student loans who have not received any relief on their interest rates this year, although some may have obtained temporary forbearances from their lenders.
There are also millions of borrowers with older federal loans who did not qualify for the CARES Act relief. This includes borrowers in the Federal Family Education Loan (FFEL) program, whereby the government has supported loans that are actually owned by commercial lenders, and those with Perkins loans, some of which are owned by colleges.
There are also income thresholds for taking advantage of the maximum value of the deduction. If you are a single tax filer, you need a modified adjusted gross income of $ 70,000 or less. If you are married and you are filing jointly, the threshold is $ 140,000. Borrowers earning up to $ 85,000 (single) or $ 170,000 (married) may qualify for a partial deduction. (These income limits are based on the The most recent guidelines from the IRS, but the agency has yet to release a 2020 update.)
Loans that count for the deduction include any loan used to pay an eligible student (you, a spouse or a dependent) for eligible education expenses, such as tuition, fees, books, supplies. , accommodation and meals at an eligible establishment.
Finally, there are a few other stipulations to be able to claim this deduction, including that your reporting status is not a separate filing, and you cannot be claimed as another person’s tax dependent. You also cannot claim the deduction for payments you made on behalf of someone else (such as a parent helping a child pay off a debt).
If you are not sure whether you are entitled to the deduction, the IRS has an interactive tool to determine if you can claim a deduction for student loan interest.
Who benefits the most from the deduction?
Since this is a deduction as opposed to a tax credit (which cuts your tax bill by dollar for dollar), it takes a bit of math to figure out how much the deduction is actually worth.
The maximum benefit of the interest deduction on student loans is $ 550 this year, but the average amount – even in a typical year – is smaller. The average deduction is around $ 1,000 according to IRS data, which suggests that the average benefit is around $ 200, says Mark Kantrowitz, editor of Savingforcollege.com.
The value of the deduction depends on both a borrower’s income and the amount of interest he pays on his loans. Suppose a borrower has an average student loan balance of about $ 37,500 at an interest rate of 5% and has a 10-year repayment plan. They will pay more than $ 10,250 in interest only if they only make the minimum payments for the full repayment period.
That comes down to about $ 1,800 in interest that they could deduct in their first few years of repayment. (As you continue to reduce your principal, the amount of interest paid also decreases.) If you earned $ 50,000 and paid $ 1,800 in interest, the deduction would save you $ 396.
Of course, there are millions of borrowers who have six-figure student loan balances, and many have interest rates well over 5%. Private student loans often carry rates that are double. Borrowers with large balances or high interest rates can more easily claim the maximum deduction of $ 2,500.
Finally, borrowers in higher tax brackets usually get the most savings from the deduction. Since they pay higher tax rates, lower taxable income translates into more savings. But because of the income cap, the majority of tax filers who claim the deduction earn less than $ 100,000. Almost two-thirds of deductions are claimed by taxpayers earning between $ 30,000 and $ 99,999, according to a analysis by Credible.
More money :
Should you continue to pay your student loans even though they might be forgiven?
Student loan borrowers have just received another month of relief. Here is why it could be much longer
The 3 current student loan forgiveness proposals: who would qualify?
[ad_2]
