If you paid loan interest for the year, you might just qualify for a tax break from Uncle Sam. According to the IRS, you can deduct personal interest expenses paid on a student loan, mortgage, second mortgage, line of credit or home equity loan. If you're self-employed and use your car for the business, you might be able to deduct the interest paid on your car loan as a business expense. Once you determine which deductions you qualify for, you can easily calculate your loan interest.
Student Loan Interest Deduction Requirements
As of 2013, you can deduct up to $2,500 in student loan interest paid for the year. The IRS sets certain eligibility rules for the deduction, so not everyone who pays interest will actually qualify for the deduction. The student must be enrolled in school at least half-time in a program that leads to a degree or certification. You also must be legally obligated to repay the loan. For example, if you are a student making payments on a loan your parents took out for you, you can't claim the interest. Another requirement is that your filing status can't be married filing separately. However, you can be married filing a joint return, single or head of household. If you are a dependent on someone else's return, you can't deduct the interest. Finally, your modified adjusted gross income must fall below a certain amount set by the IRS annually.
Mortgage and Other Home Loans
If you want to claim the mortgage interest deduction, you'll need to itemize your deductions. The deduction is available for any interest you pay on a loan secured by your main home or a secondary home. The IRS allows the deduction for a mortgage to purchase your home, second mortgage, line of credit and home equity line. If the home doesn't secure the loan, it's classified as a personal loan and ineligible for the interest deduction. As long as you're legally obligated to repay the debt and make the payments, you can claim the interest you actually paid. If you're married filing a joint return, you can deduct a maximum of $1 million in mortgage debt for the first or second home. For single tax filers, the maximum is $500,000. Loan interest paid on an equity loan or line of credit is limited to $100,000 for married taxpayers filing joint returns or $50,000 for single taxpayers.
Your car loan is only deductible as a business expense if it is used specifically for your business. If you use your car to travel to and from a job where you work as an employee, you can't deduct the loan interest. If your car is used strictly for business, you're entitled to claim all the interest paid on the loan. If the car is used for personal use in addition to business, you can only deduct the business percentage based on the actual usage. For example, if you use the car 80 percent of the time for business and 20 percent for personal transportation, you can deduct 80 percent of the interest paid on the loan for the year.
1098 Interest Statements
If you paid more than $600 in student loan or home loan interest for the year, the government agency or financial institution is required to mail you a Form 1098. For a student loan, you will receive a Form 1098 Student Loan Interest Statement. If you paid a mortgage or home loan, you will receive a Form 1098 Mortgage Interest Statement. You won't get a 1098 for interest paid on a car loan, since it is not a common deduction. The statement indicates the exact amount you paid in loan interest. If your statement hasn't arrived, you can request a copy by contacting the loan servicer. If you don't have a Form 1098 available, you can use an account statement from your lender showing the payments you made during the year. The statement should divide your payment into principal and interest. Add up all the interest payments for the year to determine the deductible amount.
If you don't have a 1098-E or account statement, you can use an online loan interest calculator and amortization table to determine the amount of interest you paid. An amortization table shows you how much of each payment is applied towards the principal and interest. Bankrate.com features a free loan calculator and amortization schedule. You just enter the principal, loan term, interest rate and the calculator does the rest. If you made extra payments, partial payments, deferred payments or missed payments, the results will not be accurate unless you adjust the numbers accordingly.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.