Frequently Asked Tax Questions And Answers
Keyword: Loans
3.2 Itemized Deductions/Standard Deductions: Education & Work-Related Expenses
The maximum deductible interest on a qualified student loan is $2,500 per return.
There is no deduction if you file as married filing separately, if you are claimed as a dependent, or if the loan is from a related party or a qualified employer plan. There are limits based on your filing status and adjusted gross income. For more information, refer to Publication 970, Tax Benefits for Education, and Tax Topic 513, Educational Expenses .
In order for a taxpayer to claim a deduction for student loan interest, the loan must be incurred for the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the taxpayer took out the loan. Since you were not your parents' dependent when they took out the student loan, the interest they paid on the loan does not qualify for deduction. However, the student loan interest payments you made on the student loan you took out on your behalf are eligible for deduction, provided all the other requirements are met. For more information, refer to Publication 970, Tax Benefits for Education, Chapter 4; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.
Unless you have begun construction of a home on the bare land that you can occupy within 24 months the interest you paid on the second mortgage would not qualify as deductible mortgage interest. . For more information, refer to Publication 936, Home Mortgage Interest Deduction.
You may deduct home equity debt interest, as an itemized deduction, if you are legally liable to pay the interest, pay the interest in the tax year, secure the debt with your home, and do not exceed certain limitations. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.
A loan taken out for reasons other than to buy, build, or substantially improve your home, such as to pay off personal debts may qualify as home equity debt. The interest would be deducted on Form 1040, Schedule A (PDF), Itemized Deductions. The amount you can deduct as interest on home equity debt is subject to certain limitations. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.
The mortgage interest on a second home which you use as a residence for some portion of the taxable year, is generally deductible if the interest satisfies the same requirements for deductibility as interest on a primary residence. Real estate taxes paid on your primary and second residence are, generally, deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property. For more information, refer to Publication 17, Your Federal Income Tax for Individuals, Chapter 24; Tax Topic 503, Deductible Taxes; and Publication 530, Tax Information for First-Time Home Owners.
No, you don't divide the points by 30. If you choose to use the straight-line method, you need to divide the points by the number of payments over the term of the loan and deduct points for a year according to the number of payments made in the year. If the loan ends prematurely, due to payoff or refinance with a different lender, for example, then the remaining points are deducted in that year. Points not included in Form 1098 (PDF) (usually not included on a refinance) should be entered on Form 1040, Schedule A (PDF), Itemized Deductions. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.
References:
- Publication 936, Home Mortgage Interest Deduction
- Tax Topic 504, Home Mortgage Points
- Form 1040, Schedule A (PDF), Itemized Deductions
If you default on a loan from your 401(k) plan, you are considered to have received a distribution from your 401(k) plan. Whether or not you will have to pay the 10 percent additional tax on early distributions from 401(k) plan depends on a number of factors, including your age.
In order to avoid the 10 percent additional tax on early distributions from qualified retirement plans, the following all must be true:
- you received the distribution after you left the company; and
- you left the company during or after the calendar year in which you reached age 55; and
- your departure from the company qualifies as a separation from service.
Higher education expenses paid by the proceeds of a government subsidized loan expenses may qualify for the credit if you must repay the loan. The credit is claimed in the year in which the expenses are paid, not in the year in which the loan is repaid.
For more information, refer to Form 8863 (PDF), Education Credit (Hope and Lifetime Learning Credits), Publication 970, Tax Benefits for Education, or Tax Topic 605, Education Credits.