|FAQ Keyword 109
||2006 Tax Year
What are the limits for deducting interest paid on a student loan?
The maximum deductible interest on a qualified student loan is $2,500 per
return. If you are a taxpayer whose return status is married filing jointly,
you are allowed to deduct the full $2,500 only when your modified adjusted
gross income (MAGI) is $100,000 or less. If your MAGI is more than $105,000,
but less than $135,000, the amount of your student loan interest deduction
is gradually reduced. The instructions for Form 1040 (PDF) show you how to compute the deduction. If your MAGI is $135,000
or more, you are not able to take any deduction.
For those whose filing status is single, head of household, or qualifying
widow(er), the full $2,500 deduction is allowed for MAGI levels equal to or
below $50,000. For MAGI between $50,000 and $65,000, the deduction amount
is gradually reduced. The Form 1040 Instructions show
you how to compute the deduction. If your MAGI amount is $65,000 or more,
there is no deduction.
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. For more information, refer to Publication 970, Tax
Benefits for Education, Chapter 4; Tax Topic 505, Interest Expense;
and Tax Topic 513, Educational Expenses .
Last year, my parents took out a student loan for me in their name
and I also took out a student loan. My parents received Form 1098-E for their
loan and I also received Form 1098-E for my loan. Can we both claim the interest
from the loans on our tax returns? Last year, I was not their dependent.
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.
I have a mortgage for my primary residence and a second mortgage
for land that I intend to build a home on. Can the interest be deducted for
the second mortgage?
Unless you have begun construction of a home on the bare land that you
can occupy within 24 months, the land would be considered an investment and
the interest you paid on the second mortgage would not qualify as deductible
mortgage interest. However, it would constitute investment interest if you
itemize your deductions. For more information, refer to Publication 550, Investment
Income and Expenses, Chapter 3 and Publication 936, Home Mortgage
Is interest on a home equity line of credit deductible as a second
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.
I refinanced my home last year and paid points. Are they all deductible
Generally points paid to refinance your home are not deductible in their
entirety in the year paid. They are "amortized" or deducted over the life
of the loan. For more information, refer to Publication 936, Home
Mortgage Interest Deduction, and Tax Topic 504, Home Mortgage
I took out a home equity loan to pay off personal debts. Is this
interest deductible? Where do I enter this amount on my tax return?
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.
Is the mortgage interest and property tax on a second residence
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.
If I must deduct points over the life of my mortgage, and I have
a 30 year mortgage, does this mean that I divide the points paid by 30 and
enter that amount on Schedule A?
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.
My understanding is that if I am over age 55 and default on a loan
through my 401(k) plan when leaving the company, the 10% penalty is forgiven.
Can you confirm that for me?
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.
In addition, you may avoid the 10 percent additional tax if you meet
one of the other exceptions shown in Publication 560
, Retirement Plans
for Small Business
, and Publication 575
, Pension and Annuity
If tuition was paid by a government subsidized loan, can I still
take the Hope or Lifetime Learning Credit?
If you take out a loan to pay higher education expenses, those expenses
may qualify for the credit if you will be required to pay back 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.
Previous | FAQ Index | Next
You can search for information in the entire Tax Prep Help section, or in the entire site. For a more focused search, put your search word(s) in quotes.
Tax Topic Categories | FAQ Categories | Tax Prep Help Main | Home