Can I file Form 1040EZ if I have interest to deduct from student loans?

No, you cannot claim the student loan interest deduction on Form 1040EZ (PDF). To claim a student loan interest deduction, U.S. citizens and resident aliens must file either Form 1040 (PDF) or Form 1040A (PDF). For more information on which form to file, refer to Publication 17, Your Federal Income Tax for Individuals.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 505, Interest Expenses
• Tax Topic 513, Educational Expenses
• Publication 17, Your Federal Income Tax for Individuals

Can I take a deduction for the interest I paid on my student loan?

Starting in 1998, taxpayers who have taken out qualified loans to pay certain costs of attending an eligible educational institution for themselves, their spouse, or their dependent are allowed to take a deduction from gross income for the interest they paid on these student loans. Prior to 2002, deduction of student loan interest was limited to the first 60 months of required interest payments, and, was subject to income limitations. Beginning in 2002, interest paid over any period of time on a qualified education loan is deductible. There are also income limits. For more information, refer to Publication 970, Tax Benefits for Higher Education; and Tax Topic 456, Student Loan Interest Deduction.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 456, Student Loan Interest Deduction

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 between $100,000 and $130,000, 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 $130,000 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 phased out, and computation instructions are provided in the Instructions for Form 1040. 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 Higher Education ; Tax Topic 505, Interest Expense ; and Tax Topic 513, Educational Expenses .

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 505, Interest Expense
• Tax Topic 513, Educational Expenses

Is the $2,500 maximum deduction for student loan interest per PERSON, or per RETURN? I am married filing jointly, and have paid over $3,000 of qualified interest payments for my husband and I. Are we allowed to deduct $5,000 ($2,500/person) or only $2,500 total on our return?

The deduction is limited to $2,500 per return for tax year 2001 and beyond. If you file as "married filing separately," there is no deduction. For more information, refer to Publication 970, Tax Benefits for Higher Education; and Tax Topic 505, Interest Expense.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 505, Interest Expense
• Tax Topic 513, Educational Expenses

If I file married filing separately can I claim the student loan interest deduction?

No, you cannot claim the deduction in any tax year in which your filing status is "married filing a separate return." For more information, refer to Publication 970, Tax Benefits for Higher Education, Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 505, Interest Expense
• Tax Topic 513, Educational Expenses

I am a parent repaying a loan for my daughter's college education. The loan is a parent's loan taken out in my name. Is the interest deductible on my tax return?

If your daughter was your dependent when you received the loan, the interest you paid on the loan is deductible, provided all other requirements are met. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expense.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 505, Interest Expense
• Tax Topic 513, Educational Expenses

My mother borrowed money for my college education. Now that I'm out of school, I make the monthly payments, but the loan is under her name. Can I take the student loan interest deduction since I'm actually making the payments?

You will not be able to take a deduction for the student loan interest that you pay because you are not the one obligated to pay on the loan. However, your mother may take the deduction, provided all other requirements for the deduction are met. The payment made by you is treated as a gift to her, and then a payment by her. For more information, refer to Publication 970, Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 505, Interest Expenses
• 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' 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 Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 505, Interest Expense
• Tax Topic 513, Educational Expenses

Can you tell me where on the Internet I can find the AFR, Applicable Federal Rate, for the months in 2002?

The Applicable Federal Rates for each month can be found in the first weekly Internal Revenue Bulletin (IRB) published for that month. The Internal Revenue Bulletins are located on the IRS web-site called the "Digital Daily." In the "Search IRS site for : " box, enter "applicable federal rates index." Click on "go" and a page with a link to AFRs will pop-up. The Digital Daily may be accessed at www.irs.gov .

References:

• Applicable Federal Rates
• Tax Information for You
• www.irs.gov

I made a personal loan of $3,500 to a friend. She declared bankruptcy after only paying me back $500.00. Does the IRS allow any provision for my loss?

If, in a true debtor-creditor relationship, someone owes you money that you cannot collect, you have a bad debt. There are two kinds of bad debts - business and nonbusiness.

Bad debts are deductible only if the amount owed to you represents a loan of your cash or has been previously included in your income. A business bad debt, generally, is one that comes from operating your trade or business. All other bad debts are nonbusiness.

Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and that the debt is worthless. You may take the deduction only in the year the debt becomes totally worthless. A debt becomes totally worthless when there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due. A nonbusiness bad debt is taken as a short-term capital loss on Form 1040, Schedule D (PDF), Capital Gains and Losses .

For more information on bad debts, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expenses.

Form 1040, Schedule D (PDF), Capital Gains and Losses.

References:

• Publication 550, Investment Income and Expenses
• Publication 535, Business 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, and Publication 936, Home Mortgage Interest Deduction.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 505, Interest expense

Is interest on a home equity line of credit deductible as a second mortgage?

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 your Home Equity Debt Limit. For more information, refer to Publication 936, Home Mortgage Interest; and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

I refinanced my home last year and paid points. Are they all deductible this year?

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 Points.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 504, Home Mortgage Points

Is the interest paid on the loan for a lot (with no home on it) deductible as mortgage interest?

Generally, the interest paid on the loan incurred for purchasing a lot is not deductible as mortgage interest.

If you are planning to build a house, you can start deducting mortgage interest once construction begins. The following is from Publication 936, Home Mortgage Interest Deduction:

You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. The 24-month period can start any time on or after the day construction begins. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expenses

We purchased land to build a home on. Is the interest on the mortgage secured by the land deductible?

Interest on the mortgage secured by bare land is not, generally, deductible as mortgage interest. In order for interest to be deductible as home mortgage interest, the loan must be secured by a qualified residence. A qualified residence is your principal residence or one other residence selected by you that you use as a residence.

Once you start construction of your home, you may treat the home under construction as a qualified residence for a period of up to 24 months, but only if the home becomes a qualified residence at the time it is ready for occupancy. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

Is interest paid on a construction loan for a new home considered deductible mortgage interest?

You can treat a home under construction as a home qualifying for the home interest deduction for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

I got a loan to buy some land. Later I got another loan for the construction of the house. After the house was built I got a third loan which paid off the first two loans. Is the interest on any of these loans deductible?

All three loans may have some deductible interest. Generally, the interest paid on a financed lot is not deductible as mortgage interest. There might be a deduction for investment interest until construction of the home begins. Once construction begins, you can, deduct mortgage interest on the construction loan for up to 24 months. Once the home has been completed and occupied by you, and the two existing loans have been refinanced, you may deduct the interest from the new mortgage. For more information, refer to Publication 936, Home Mortgage Interest Deduction; Tax Topic 505, Interest Expense; and Publication 550, Investment Income and Expenses.

References:

• Publication 936, Home Mortgage Interest Deduction
• Publication 550, Investment Income and Expenses
• Tax Topic 505, Interest Expense

I pay interest on money borrowed to purchase land. I built a home on that land, but have no mortgage. Is the interest I pay for the land deductible? Where is it deductible on the return?

Until you started construction, the interest on the loan to purchase the lot was not deductible as mortgage interest. Once you started construction on the property, it became deductible as home mortgage interest provided that the loan was secured by the house, and all other conditions for deductibility of home mortgage interest were met. For more information, refer to Publication 936, Home Mortgage Interest Deduction and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

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 line 10, Form 1040, Schedule A (PDF), Itemized Deductions. You may not deduct interest on any amount of home equity debt that exceeds your Home Equity Debt Limit. For more information, refer to Publication 936, Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

If I borrow money from my 401(k) to purchase a home, is the interest I pay back to my 401(k) deductible as mortgage interest on my 1040?

The interest you pay on money you borrow from 401(K) plan to buy a home is not deductible as mortgage interest, because the loan is not secured by the home. The mortgage must be a secured debt on a qualified home. Your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. The term "qualified home" means your main home or second home. For details, refer to Publication 936 , Home Mortgage Interest Deduction and Tax Topic 505, Interest Expense.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

Is the mortgage interest and property tax on a second residence deductible?

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; Tax Topic 503, Deductible Taxes; and Publication 530, Tax Information for First-Time Home Buyers.

References:

• Publication 936, Home Mortgage Interest Deduction
• Publication 530, Tax Information for First-Time Homeowners
• Publication 17, Your Federal Income Tax for Individuals
• Tax Topic 503, Deductible Taxes
• Tax Topic 505, Interest Expense

What are the rules for mortgage interest on a manufactured home? Can I deduct the interest on the mortgage for the manufactured home if it is on a rented lot? Can I deduct the interest for the manufactured home and for the lot if I buy a lot for the home?

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, boat, or similar property that has sleeping, cooking, and toilet facilities.

The mortgage interest on a manufactured home may be deducted if the home is on a rented lot. If you buy a lot and place a manufactured home on it, the interest paid for the lot is also qualifying home mortgage interest, provided the mortgage is secured by the house.

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 505, Interest Expense

I refinanced my home and paid closing costs. Are the loan origination fee, appraisal fee, document prep fee, closing fee, and title insurance or any of the other expenses deductible? Are any of the fees I paid to the bank for the loan deductible?

Deductible fees are limited to home mortgage interest and certain real estate taxes. Points that represent interest on a refinancing are amortized over the life of the loan.

Fees that are not associated with the acquisition of a loan may only have effect on the basis of the home. An example would be a transfer tax that would be charged regardless of whether a loan was involved.

Fees related to the acquisition of a loan are not deductible and are not basis adjustments. A credit report fee is a good example.

For more information, refer to Publication 936, Home Mortgage Interest Deduction ; Tax Topic 504, Home Mortgage Points; and Publication 551, Basis of Assets .

References:

• Publication 936, Home Mortgage Interest Deduction
• Tax Topic 504, Home Mortgage Points
• Publication 551, Basis of Assets

I refinanced my home mortgage and had to pay $2,000.00 worth of points to get the mortgage. Can I claim these points as a deduction on my tax return?

Points that represent interest paid for a refinanced mortgage have to be amortized over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees are not interest and cannot be deducted. It is possible to deduct a larger percentage of the points in the first year if a portion of the mortgage proceeds is used to improve the home and sufficient cash is added to the transaction to be equal to or greater than the amount of the points. Certain other restrictions apply. 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

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?

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, 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 line 12 of 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

I refinanced my home once and paid $1,230 in points. On Schedule A, line 12 (points not reported on Form 1098) I have listed $41 each year. I refinanced my home again and paid off the entire previous loan. Am I entitled to include the $984 (remaining points paid off) on Schedule A this year?

If you spread your deduction of the points over the life of the mortgage, you can deduct any remaining balance of the points in the year the mortgage ends. A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

Under the conditions described in the question, the $984 would be deductible in the year the mortgage ended. You would report the deduction 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

Is money from student loans considered taxable income?

A school loan is not taxable at the time you get the money and should not be included as income on your return. A loan is not income because you are expected to repay the amount borrowed (plus interest). If, at a later date, any part of the loan is forgiven, the amount forgiven would be income in that year. Under certain circumstances, student loans forgiven are not income. For more information, refer to Exceptions under Canceled Debts in Publication 525, Taxable and Nontaxable Income.

References:

• Publication 525, Taxable and Nontaxable Income
• Tax Topic 422, Nontaxable income

I left a company where I had an outstanding loan through my 401(k) and did not pay the loan back. How do I report this on my Form 1040?

You should receive a Form 1099-R reporting the outstanding loan as a distribution from the 401(k) plan. This income is reported as ordinary income on line 16b of Form 1040. If you are under the age of 59 1/2, you are also subject to a 10 percent additional tax on early distributions from qualified retirement plans unless you qualify for an exception listed in Publication 575, Pension and Annuity Income. This 10% additional tax is reported on line 57 of Form 1040. If you are subject to the 10 percent additional tax on early distributions from qualified retirement plans and the Form 1099-R has code 1 in Box 7, write "no" on the dotted line next to line 57. If you are subject to the 10 percent additional tax on early distributions from qualified retirement plans and the Form 1099-R does not have code 1 in Box 7, you also need to file Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's), and other tax-favored accounts..

References:

• Publication 575, Pension and Annuity Income
• Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's), and other tax-favored accounts
• Instructions for Form 5329, Additional Taxes on Qualified Plans (including IRA's), and other tax-favored accounts
• Tax Topic 558, Tax on early distributions from retirement plans
• Tax Topic 412, Lump-sum distributions

My understanding is that if I am over age 55 and default on a loan through my 401(k) 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), you are considered to have received a distribution from your 401(k). 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

you left the company during or after the calendar year in which you reached age 55

your departure from the company qualifies as a separation from service

or, you must meet one of the other exceptions shown in Publication 560, Retirement Plans for Small Business and Publication 575, Pension and Annuity Income.

References:

• Publication 560, Retirement Plans for Small Business
• Publication 575, Pension and Annuity Income
• Tax Topic 558, Tax on early distributions from retirement plans

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 quality 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.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 605, Education credits
• Form 8863 (PDF), Education Credits (Hope and Lifetime Learning Credits)

If education expenses were paid by a school loan that the student has not began paying back, do the expenses still qualify for the Hope or Lifetime Learning Credits?

The rule for a school loan is the same as the rule for a government subsidized loan. Even though the loan proceeds are not income to you, expenses paid from the loan proceeds may qualify for the Hope or Lifetime Learning Credit if the loan must be repaid. The education credit is claimed in the year in which the expenses are paid, not in the year in which the loan is repaid.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 605, Education credits
• Form 8863 (PDF), Education Credits (Hope and Lifetime Learning Credits)

I did not attend school this year, but made loan payments on a loan I previously took out to pay my college tuition. Can I claim a lifetime credit for the money I used to repay the loan?

No, payments on your student loans do not qualify for the Lifetime Learning Credit. However, interest on student loans may be deductible for Federal income tax purposes if you meet certain conditions. For more information, refer to Publication 970, Tax Benefits for Higher Education.

References:

• Publication 970, Tax Benefits for Higher Education
• Tax Topic 605, Education credits
• Form 8863 (PDF), Education Credits (Hope and Lifetime Learning Credits)

I gave my friend a loan to do business, but the business went bankrupt and she did not pay me back. Can I deduct this bad loan?

If someone owes you money that you cannot collect, you have a bad debt. Bad debts are deductible only if the amount owed has been previously included in your income. For a discussion of what constitutes a valid debt, see Publication 535, Business Expenses and Publication 550, Investment Income and Expenses . If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for expected income you have not received, since it was never included in your income. There are two kinds of bad debts - business and nonbusiness.

A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and that the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due.

A nonbusiness bad debt is reported on Form 1040, Schedule D (PDF) , Capital Gains and Losses, as a short-term capital loss. It is subject to the capital loss limit of $3,000 per year. This limit is $1,500 if you are married filing a separate return. A nonbusiness bad debt requires a separate detailed statement attached to the schedule D. For more information on nonbusiness bad debts, refer to Publication 550, Investment Income and Expenses . For more information on business bad debts, refer to Publication 535, Business Expenses .

References:

• Publication 535, Business Expenses
• Publication 550, Investment Income and Expenses
• Form 1040, Schedule D (PDF), Capital Gains and Losses