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3 Confusing Tax Deductions Made Easy

While tax professionals have more tax wisdom than your average Joe, not all understand the quirks of some deductions. Here are 3 deductions that frequently stump tax experts, explained properly, to ensure there are no hiccups in your tax return processing.

Deducting Student Loan Interest

Tax time is the only time the phrase “student loan interest” means something good. That’s because you can get a deduction for the interest you paid on student loans. Plus, there’s no need to itemize to get this nice little break.

There are three rules though. For 1) you have to be legally obligated to pay the loan interest. For 2) a dependent can’t claim the student loan interest tax deduction on their own return. For 3) when the loan was taken out, the student must have been enrolled at least half-time in a program on-track to a recognized educational credential.

Number one and two are tricky because while the student is usually the one taking out the loan, the parents are often the ones footing the bill. Plus, college-age students are still usually dependents. Luckily, there are a couple of easy workarounds. One solution is for the parents to co-sign the loan payments or take out the loan themselves. Problem solved.

Deducting State and Local Taxes

The old saying “you can’t have your cake and eat it too” has never been more true than when it comes to state and local taxes. When itemizing deductions, you can claim state and local sales taxes OR you can claim state and local income taxes. But you can’t have both. Texans and people who live in other states where there’s no income tax are obviously going to want to take the sales tax road.

However, this route can get a little rocky a ways up. That’s because there are three paths to claiming the sales tax deduction. You can 1) take a look at your income, exemptions, and location, and then match-up with an amount on an IRS table. Or 2) claim the amount from that same table, but then also tack on actual amounts paid for items like a boat, major home improvement, and other big, specific stuff. Or finally, 3) claim the actual sales tax paid for everything.

The problem is that actual expenses are still at the mercy of the general sales tax. For example, if you buy a car and pay more sales tax on it than the general sales tax rate, you can only add the amount you would have paid at the general sales tax rate. Sorry. And, if you buy a boat or an aircraft, you can’t take the deduction at all if you paid more sales tax on those items than the general sales tax rate. Sorry again.

Deducting Mortgage Refinancing Points

While mortgage refinancing points might sound like they belong in a video game, these points actually have real world tax implications. In general, you can’t deduct points paid to refinance your existing mortgage in the year that you pay them, and you have to instead amortize them over the life of the loan. But let’s say you paid off your mortgage last year. You can deduct any leftover points that weren’t amortized in that year, as long as you didn’t refinance the mortgage with the same old lender.

Also, if you spruced up your house and covered the costs using some of the proceeds from refinancing the house, you can deduct the paid points that went to the home improvement project. To qualify for this, the points need to have been paid at the time of refinancing. Now aren’t you even happier you decided to add a guest bathroom?