Student Loans: You Might Qualify for an Interest Deduction Even with Payments Paused — Here’s Why
Normally, student loan borrowers can deduct the interest they paid on their loans from their income tax returns, but things haven’t been normal for a few years. Federal student loan payment pauses enacted during the COVID-19 pandemic meant millions of borrowers didn’t have to pay their loans or the interest on them, so the interest deduction didn’t come into play.
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That was still the case in 2022. However, some borrowers can still deduct student loan interest from their tax returns this year even if some of their loans were paused last year.
This applies if you owe student loans that haven’t been eligible for the payment pause, CNBC reported. Examples include commercially held Federal Family Education Loans (FFEL) or any private student loans. In these cases, you might be able to deduct the interest on the loans. But any loans that qualified for the full payment pause in 2022 are not eligible for the deduction.
The best way to find out if you can deduct interest is to contact your loan servicer.
The IRS defines student loan interest as any interest you paid during the year on a qualified student loan, including both required and voluntarily pre-paid interest payments. You can deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.
The deduction is claimed as an adjustment to income, so there’s no need to itemize your deductions. You can claim the deduction if the following apply:
You paid interest on a qualified student loan in tax year 2022.
You’re legally obligated to pay interest on a qualified student loan.
Your filing status isn’t married filing separately.
Your MAGI is less than a specified amount that is set annually.
If filing jointly, neither you nor your spouse can be claimed as dependents on someone else’s return.
Keep in mind that when you reach a certain income, the student loan interest deduction no longer applies. For the 2022 tax year, individuals who earned above $85,000 and couples who earned above $175,000 are not eligible.
Your eligibility for the deduction might also be reduced if your employer made payments on your student loans as a work benefit, Betsy Mayotte, president of The Institute of Student Loan Advisors, told CNBC.
If you paid $600 or more of interest on a qualified student loan during the year, you should receive a Form 1098-E, Student Loan Interest Statement from the entity to which you paid the student loan interest, according to the IRS.
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For more information about the student loan interest deduction and how your MAGI affects the deduction amount, refer to IRS Publication 970 and the IRS page Can I Claim a Deduction for Student Loan Interest?
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This article originally appeared on GOBankingRates.com: Student Loans: You Might Qualify for an Interest Deduction Even with Payments Paused — Here’s Why