By Annie Nova
It’s a strange time for people with federal student loan bills, which means that their experience with this year’s tax season will likely also be unusual.
The Biden administration’s plan to cancel up to $20,000 in student debt for tens of millions of Americans is on hold until the Supreme Court decides if the relief policy is legal.
Here’s what this all means for your tax bill to Uncle Sam.
You probably can’t claim a student loan interest deduction
Before the Covid pandemic, nearly 13 million taxpayers took advantage of the student loan interest deduction, which allows borrowers to deduct up to $2,500 a year in interest payments they’ve made on their private or federal student loans.
The deduction, which lowers your adjusted gross income, is “above the line,” meaning you don’t need to itemize your taxes to qualify for it.
Even if you’ve continued making payments during the pause, 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, Kantrowitz said, and interest has been suspended now for years.
(Most recently, the Biden administration said the bills will resume 60 days after litigation over its forgiveness plan resolves or at the end of August — whichever comes sooner.)
Still, some people may qualify for the break.
If you owe student loans that haven’t been eligible for the government’s payment pause, including commercially held Federal Family Education Loans (FFEL) or any private student loans, you may have made interest payments that can be deducted.
The best way to determine if you have potential interest to claim is to contact your loan servicer, said Betsy Mayotte, president of The Institute of Student Loan Advisors.
Mayotte said to keep in mind that there are income phaseouts for the break, and individuals who earned above $85,000 and couples who made more than $175,000 in 2022 are not eligible at all.
Your lender reports your interest payments over a certain amount to the IRS on a tax form called a 1098-E, and should provide you with a copy, too. Depending on your tax bracket and how much interest you paid, the deduction could be worth up to $550 a year, Kantrowitz said.
Loan forgiveness is unlikely to raise your taxes
If the Supreme Court allows the administration to carry out its debt relief plan, borrowers shouldn’t get hit with a federal tax bill next spring.
That’s because The American Rescue Plan of 2021 made student loan forgiveness tax-free through 2025 — and the law covers Biden’s forgiveness, too, according to a fact sheet from the White House.
However, there’s a chance you’ll have to pay state taxes on any forgiven debt.
This article originally appeared here and was republished with permission.