Ask the tax adviser
By George Saenz • Bankrate.com

March 17, 2000 -- Today, the tax adviser discusses the deductibility of mortgage points and tax breaks for student expenses.

Mortgage loan points

Dear Tax Talk:
I bought a single-family home in December of 1998 and paid $2,240 in points. Is the amount fully deductible this year? Thanks.
Jenni

Dear Jenni:
You may be a victim of bad timing. In general, points paid on the purchase of a new home are fully deductible if:

1. They are computed as a percentage of the amount borrowed, (i.e. you cannot consider other costs of closing such as survey, title insurance etc., as points)
2. It is customary business practice to charge points in the area where the home is located, (i.e. you are not paying points to get a significantly reduced interest rate, although sometimes you may pay a little more in points to get a better rate),
3. The property will be used as the home of the buyer, and
4. The amount is actually paid by the buyer. The key here is that the points are paid and not financed.

You will be considered to have paid the points if the earnest and closing money exceed the points charged.

However, here's where the bad timing comes in. If you paid the points in 1998, the points are not deductible on your return for 1999. If you did not have enough deductions to itemize in 1998, then it would have been best to postpone the closing until January of 1999. I'm sorry I wasn't there to advise you at the time, but others take note.

More on the deductibility of points is available in a prior Bankrate.com tax tip.

Tax breaks for student expenses

Dear Tax Talk:
I am a full-time student and would like to know what of my expenses are tax deductible, for example, tuition, books, rent, etc. I am 22 years old and also have a part-time job. I live away from home and my mother no longer claims me. Also, is there another way I should be claiming personal allowances, which right now are only one?
Tara

Dear Tara:
There is some good news and bad news.

The bad news is that you probably do not qualify to deduct the education expenses. The good news is that you may be entitled to a credit for the expenses.

Higher education expenses are not deductible unless connected with a trade or business. Therefore, a student seeking an education and not engaged in business will not get a deduction for college expenses. Educational expenses connected with an individual's trade or business are not deductible if either:

1. The expenses for education are required to meet the minimum educational requirements for qualification in that trade or business or
2. Qualify the individual for a new trade or business. So, assuming your course work is not related to your part-time job, you are not entitled to a deduction for these expenses.

Now the good news. President Clinton, realizing the need for increased higher education, which I believe leads to more candidates for White House interns, enacted two higher education tax credits: The Hope and the Lifetime Learning credit.

The Hope Credit is available to degree-seeking students in their freshman and sophomore year of college taking at least half of a full-time load at an accredited institution (one that qualifies for financial aid assistance) and, I'm not making this up, not convicted of a felony for dealing or possessing drugs (presumably, drug dealers don't need the tax credits, as they have money).

The credit may be claimed for no more than two tax years for each eligible student. The credit is equal to 100 percent of the first $1,000 and 50 percent of the next $1,000 (that's up to $1,500 in tax credits for you English majors, including my editor) in tuition and fees -- but not books, room and board.

The Lifetime Learning Credit is 20 percent of up to $5,000 in tuition and fees. Unlike the Hope credit, it is not limited to the first two years of college; you can take it for more than two tax years, you don't have to carry a minimum load and you can have the felony conviction.

For more information on both credits, see Bankrate.com's education credits basics, a recent Bankrate.com tax tip, and Form 8863 and Publication 970 from the Internal Revenue Service.

If you are entitled to the credits, you can increase your personal allowances to take into account your reduced tax liability.

-- Posted March 17, 2000