Education & Work-Related Expenses
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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 residential aliens must file either Form 1040 (PDF) or Form 1040A (PDF). For more information on which form to file, refer to Publication 17 (PDF), Your Federal Income Tax for Individuals.
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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 (PDF), Tax Benefits for Higher Education; and Tax Topic 456, Student Loan Interest Deduction.
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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 phase 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 (PDF), Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.
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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 (PDF), Tax Benefits for Higher Education; and Tax Topic 505, Interest Expense.
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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 (PDF), Tax Benefits for Higher Education, Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.
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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 (PDF), Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; andTax Topic 513, Educational Expense.
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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 (PDF), Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.
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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 (PDF), Tax Benefits for Higher Education; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.
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3.4 Itemized Deductions/Standard Deductions: Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans, etc.)
Is the interest amount that we paid to the IRS deductible?
Interest and penalties paid to the IRS on Federal taxes are not deductible. For more information, refer to Items You Cannot Deduct in Chapter 25 of interest expense Publication 17 (PDF), Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expense.
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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," under Tax Information for You . The Digital Daily may be accessed at http://www.irs.gov.
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A family member has offered me a low interest loan for purchasing a home. Where can I find information on rates for private loans?
The rules for private or "below market" loans may be found in Publication 550 (PDF), Investment Income and Expenses. To calculate the lowest acceptable rate of interest under federal tax law, you must use the Applicable Federal Rates (AFR) that apply based on the terms and period of your loan. The applicable federal rates are published monthly in the Internal Revenue Bulletin. The Internal Revenue Bulletins may be found on the IRS' web-site, the Digital Daily, under Tax Information for You. You may access the web-site at http://www.irs.gov
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3.6 Itemized Deductions/Standard Deductions: Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)
I just bought a home. What can I deduct from the settlement statement?
If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage.
The only settlement or closing costs you can deduct are home mortgage interest, points that represent interest and certain real estate taxes. You, may, deduct them in the year you buy your home if you itemize your deductions. Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home.
You add certain other settlement or closing costs to the basis of your home. You include in your basis the settlement fees and closing costs that are for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home
There are some settlement or closing costs that you cannot deduct or add to the basis of your home. These include fees and costs that are for getting a mortgage loan. For more information refer to Publication 530 (PDF), Tax Information for First Time-Homeowners, and Publication 936 (PDF),Home Mortgage Interest Deduction
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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 (PDF), Investment Income and Expenses, and Publication 936 (PDF), Home Mortgage Interest Deduction.
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I paid my mother's mortgage and real estate taxes last year. The house is in her name. Can I deduct the mortgage interest and property tax on my tax return?
Generally, you can deduct only taxes that are imposed on you. You cannot deduct the property taxes unless you are the legal owner of the property, nor the mortgage interest unless you are legally liable for the loan. Your mother cannot deduct the mortgage interest either because she did not make the payments. For more information, refer to Publication 936 (PDF), Home Mortgage Interest Deduction; Publication 17 (PDF), Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expenses; and Tax Topic 503, Deductible Taxes.
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My daughter and I own a house together. Her name is on the mortgage, but both our names are on the deed. Can we each claim half of the yearly interest and property tax on our income tax returns?
In order for both of you to claim one-half of the interest deduction, both of you must be legally liable for the loan. Since only your daughter is legally liable for the loan, only she can deduct the interest she paid. Since both of you are legal owners of the property, both of you may deduct one-half of the real estate taxes paid during the year. For more information, refer to Publication 936 (PDF), Home Mortgage Interest Deduction; Publication 17 (PDF), Your Federal Income Tax for Individuals; Publication 530 (PDF), Tax Information for First Time Homeowners; Tax Topic 505, Interest Expense; and Tax Topic 503, Deductible Taxes.
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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 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 (PDF), Home Mortgage Interest; and Tax Topic 505, Interest Expense.
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I refinanced my home last year and paid points. Are they all deductible this year?
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 (PDF) , Home Mortgage Interest Deduction, and Tax Topic 504, Home Mortgage Points.
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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 (PDF), 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 (PDF), Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.
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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 (PDF), Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.
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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 (PDF), Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.
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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 (PDF), Home Mortgage Interest Deduction; Tax Topic 505, Interest Expense; and Publication 550 (PDF), Investment Income and Expenses.
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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 (PDF), Home Mortgage Interest Deduction and Tax Topic 505, Interest Expense.
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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 (PDF), Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.
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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 (PDF) , Home Mortgage Interest Deduction and Tax Topic 505, Interest Expense.
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Is personal credit card interest tax deductible?
No. Personal interest is not deductible. For more information, refer to Publication 17 (PDF), Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expense.
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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 (PDF), Your Federal Income Tax for Individuals; Tax Topic 503, Deductible Taxes; and Publication 530 (PDF), Tax Information for First-Time Home Buyers.
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I bought a 5th wheel trailer for vacationing. Can I deduct the interest on the loan for this 5th wheel? Where would it be listed?
You can deduct the interest paid on the loan you took out to purchase the trailer as acquisition indebtedness interest only if the loan is secured by the trailer and the trailer meets the requirements of a qualified home. A qualified home includes a house, condominium, cooperative, mobile home, boat or similar property that has sleeping, cooking and toilet facilities. You can only have one principal residence and one qualified second home. Regardless of whether the trailer qualifies as a home, interest on home equity indebtedness secured by another qualified home and used to acquire the trailer may also be deductible. The interest is deducted as mortgage interest on line 11 of Form 1040, Schedule A (PDF), Itemized Deductions.
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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.
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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 amorized 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 (PDF), Home Mortgage Interest Deduction; Tax Topic 504, Home Mortgage Points; and Publication 551 (PDF), Basis of Assets.
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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 (PDF), Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.
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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 (PDF), Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.
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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 (PDF), Home Mortgage Interest Deduction; and Tax Topic 504, Home Mortgage Points.
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9.5 Estimated Tax: Penalty Questions
What is the minimum amount of estimated tax that I am required to pay without incurring any penalty or interest charges?
In general, you may owe a penalty for 2002 if the total of your withholding and estimated tax payments did not equal at least the smaller of:
- 90% of your 2002 tax (current year tax), or
- 100% of your 2001 tax (prior year tax). (Your 2001 tax return must cover a 12-month period.) Your 2002 tax, for this purpose, is your Total tax for 2002. There are special rules for farmers and fishermen, and for certain higher income taxpayers.
Generally, you do not have to pay an underpayment penalty if either of the following conditions apply:
- Your total tax is less than $1,000, (less withholding and credits) or
- You had no tax liability last year.
Farmers and fishermen. If at least two-thirds of your gross income for 2001 or 2002 is from farming or fishing, you are required to make one installment equal to 66 2 /3% of your 2002 tax (current year tax).
Higher income taxpayers. If less than two-thirds of your gross income for 2000 and 2001 is from farming or fishing and your adjusted gross income (AGI) for 2001 was more than $150,000 ($75,000 if your filing status is married filing a separate return in 2001), substitute 112% for 100% in (2) above.
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I was late mailing my estimated tax payment. To minimize the penalty, how do I compute the interest rate and late payment charges in order to send an additional check to the IRS as soon as possible?
The failure to pay estimated tax penalty is based upon the number of days that the payment is late and the current interest rate. Therefore, we cannot give a percentage that applies for all cases. To compute the amount of the estimated tax penalty you will need to refer to Publication 505 (PDF), Tax Withholding and Estimated Tax and Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts for directions on computing the penalty. Since the computations can get rather complicated, you may want to just send in the estimated tax payment and wait for a bill from us for the penalty.
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- Publication 505 (PDF), Tax Withholding and Estimated Tax
- Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates and Trusts
11.2 Sale or Trade of Business, Depreciation, Rentals: Rental Expenses & Passive Activity Losses (PALs)
I own a duplex. I live on one side and rent out the other. Are my mortgage interest and property taxes fully deductible on Schedule E?
No. Assuming that the loan is secured by the duplex, only the mortgage interest and property taxes for the portion you are renting are deductible on Form 1040, Schedule E (PDF), Supplemental Income and Loss. If you receive one bill, you should prorate the rental portion based on square footage. Your portion can be deducted on Form 1040, Schedule A (PDF), Itemized Deductions, if you itemize and meet the requirements for Deductible Home Mortgage Interest. For more information, refer to Publication 527 (PDF), Residential Rental Property (including Vacation Homes), Instructions for Form 1040, Schedule E, Supplemental Income and Loss, and Publication 936, Home Mortgage Interest.
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Where on Schedule E do you put costs paid (points, fees, etc.) to refinance a rental property?
Expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. You may amortize them over the life of the mortgage on line 18 of Form 1040, Schedule E (PDF), Supplemental Income and Loss.
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