How Loans Can Affect Your Tax Return

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Deduct Interest on Your Mortgage

One of the greatest benefits of owning your own home is the fact that you can get a tax deduction on the interest you have paid on your mortgage. You may also be able to claim a deduction for a mortgage on a second home. Your mortgage company should send you a 1098 form at the end of each year that indicates how much interest you paid during that year. This figure is the amount that you can claim on your tax form.


Both your primary and second home must have been used as collateral for the mortgages for you to take the deduction. Loans for mobile homes, trailers and houseboats will qualify for deductions if they have sleeping, toilet, and cooking facilities.


Deduct Points You Paid for Your Mortgage

You may also get a deduction for the points that you paid when you got your initial mortgage, refinanced that loan, or got a home equity loan. Deductions for the points that you paid will be spread out over the life of the loan.


Deduct Interest on Your Home Equity Loan

You can deduct the interest you have paid on a home equity loan. There are some restrictions, however. You can deduct interest you pay on this loan up to the first $100,000 as long as the loan does not exceed your home’s value. If, however, you use the loan to make improvements on your first or second home, you should be able to deduct the interest up to one million dollars or up to your home’s value.


Deduct Interest on Your Student Loan

You can get a tax deduction on your student loan. The 2008 IRS guidelines state that you can get this deduction if your modified adjusted gross income is less than $145,000 if you are married and $70,000 if you are single.  You will need to check for any changes in these income amounts in the year that you file.


Loans that help cover tuition and costs incurred by you, your spouse, or your dependent at least on a half-time basis for a degree or certificate program are eligible for this deduction.  Costs can include fees, room and board, books and supplies. You, your spouse, or your dependent must be enrolled at an accredited college or university, certain vocational schools, or post-secondary educational institutions.

You can claim the interest that you pay on student loans throughout the life of those loans. You are not eligible for a tax deduction, however, if you have been claimed by another taxpayer as a dependent or are married and filing separately. You also needed to have paid or incurred your education expenses shortly before or after you got the loan. 

Student loans that qualify for this deduction include Federal Stafford, Plus and FFELP Consolidation loans. Other loans may qualify if the above terms are met and you complete a W-9S form with the Student Loan Corporation, which documents that you have used the loan only for education expenses.


You will not need to itemize tax deductions on your return in order to receive a deduction for your student loan. You can claim this deduction on Line 33 of the 1040 Form or Line 18 of the 1040A form.  The worksheets for these forms contain instructions to help you determine what deductions you can claim.


Avoid Defaulting on Your Student Loan

If you do not pay back your student loan in a timely manner, your tax refund could be used as a payment for that account. This process, called the “tax offset process” will be enacted when you default on your loan and will continue until your loan has been paid in full. If you file a joint return with your spouse, your tax refund may also be used for any of your spouse’s defaulted loans.


Additional Resources:

To deduct interest that you have paid on loans, you will need to fill out the Schedule A form to your tax return.


Please be aware that tax laws frequently change. In order to keep up with current laws and to make sure that you are taking legal deductions, check the IRS website:



More information about student loans:





More information about interest deductions for mortgages and home equity loans:  
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