Financial Literacy - Growing your bottom line
taxes
Tax breaks that help you get ahead

Mortgage interest. Generally, the IRS will allow a deduction for interest paid on a home loan. That includes loans for the mortgage on your primary residence and a vacation property and, under certain conditions, interest on a second mortgage, a home equity line of credit or a home equity loan.

The IRS requires that you claim the deduction on a Form 1040 and that you -- not someone else -- are legally liable to repay the loan.

The IRS also places restrictions on whether the interest is fully deductible. In general, the combined mortgage total (including both first and second mortgages) cannot exceed $1 million.

As you pay down your loan, you'll probably pay less in interest and more in principal. In some cases, taking the mortgage interest deduction may not pay off.

"If the mortgage interest is less than the standard deduction, which is around $10,700 for a married couple, it might not be worth it to deduct the mortgage interest depending on the taxpayer's other itemized deductions," says George Saenz, a certified public accountant and Bankrate's "Tax Talk" columnist.

Tax blogger Kay Bell, a member of the Taxpayer Advocacy Panel, agrees that in some cases, the standard deduction may be a better deal.

"The standard deduction amounts have been going up, so you need to pay close attention to what those are," she says. "Some people might not have enough (interest to deduct), so it makes no sense itemizing."

2. Tax deductions for higher education

Tuition and fees. The U.S. Census Bureau estimates more than 18 million students are enrolled in American colleges. Many of those students, or their parents, will qualify for tuition and fees deductions or student loan interest deductions.

If you, your spouse or a dependent attends a qualified educational institution, you may be eligible to take a tuition and fees deduction of up to $4,000.

The IRS makes it easier to claim this deduction because you can file the slightly less complicated 1040A form. And the modified adjusted gross income, or MAGI, limits are higher than those allowed for the two major federal educational tax credits: the Hope Credit and the Lifetime Learning Credit.

The IRS calculates MAGI by taking your adjusted gross income, or AGI, and adding back such items as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for other education-related costs.

You must have a MAGI of no more than $80,000 ($160,000 if filing a joint return) to qualify for the tuition and fees deduction. Further, you cannot take this deduction if your filing status is "married filing separately" or if someone else can claim you as a dependent on their tax return.

George Saenz, a certified public accountant and Bankrate's "Tax Talk" expert, offers another caveat.

advertisement

"You can't double up and take both the tuition deduction and the Hope or Lifetime Learning credit(s) at the same time," Saenz says.

You also cannot claim this deduction for room and board -- a costly part of higher education.

Show Bankrate's community sharing policy
          Connect with us
REFINANCE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed refi 4.05%  0.06 3.99%
15 year fixed refi 3.11%  0.01 3.10%
10 year fixed refi 3.17%  0.04 3.13%
 
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.32%  0.01 4.31%
50K FICO-based HELOC 4.06% --0.00 4.06%
100K FICO-based HELOC 3.92% --0.00 3.92%
 
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.81% --0.00 2.81%
48 month used car loan 3.04% --0.00 3.04%
60 month new car loan 3.24% --0.00 3.24%
 
View Rates in your area Next
Product Rate Change Last week
1 Year CD 0.99%  0.01 0.98%
2 Year CD 1.19%  0.02 1.17%
5 Year CD 1.84%  0.01 1.85%
 
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.73%  0.01 15.72%
Cash Back Cards 16.43% --0.00 16.43%
Low Interest Cards 10.98%  0.02 10.96%
 
Next
advertisement
DAILY TAX TIP NEWSLETTER

Get expert advice during tax season on tax preparation and tips for cutting your tax bill.

advertisement

Connect with us