While the interest you pay on a personal loan isn't deductible on your federal income tax return, you may be able to deduct the interest you pay on other types of loans. Interest deductions reduce your taxable income, lowering your tax bill. Therefore, it's to your benefit to know what types of loans, in addition to your first mortgage loan, allow you to deduct the interest.

Home Equity Loan

You can deduct interest you pay on a home equity loan if you meet certain conditions. One condition is that you must use the home as your primary residence or a second home. Another is that you must secure the loan using that home as collateral.
If you take out a home equity loan to make home improvements, the IRS considers it acquisition debt, which means you can deduct the interest on a loan amount up to $100,000. However, the deduction is limited if you get a home equity loan for an amount that increases your total mortgage debt to more than the value of your home.
To claim a deduction on the interest you pay on a home equity loan, you must itemize deductions on Form 1040, Schedule A. You should receive Form 1098, Mortgage Interest Statement, from your lender at the end of the year showing the amount of mortgage interest you paid.

Mortgage Refinance Loan

A refinance loan must meet the same criteria for the mortgage interest tax deduction as your original home mortgage loan. You can claim the deduction if the home you refinance is your primary or secondary residence and you use the home as collateral to secure the loan.
If you refinance your mortgage to make home improvements, decrease the loan’s interest rate or change your loan terms, the interest is fully deductible up to the amount the IRS allows. However, if you use any of the money from a cash-out refinance for reasons other than these, you can't deduct the interest you pay on that amount.

Mortgage Points

Mortgage points, also known as discount points or loan origination fee, are considered prepaid interest and therefore are deductible as mortgage interest. Generally, points you pay when you purchase a home are fully deductible in the year you pay them.
Among the requirements, the settlement statement must indicate the points you pay to get the mortgage. The dollar amount of points paid varies depending on how much of the home's purchase price you finance.
Points you pay when you buy a second home or refinance a mortgage are deducted throughout the life of the loan. Form 1098, Mortgage Interest Statement, which you receive from your lender, shows any deductible points you paid during the tax year.

Student Loan Interest

Unlike other loan interest you can deduct on your federal income taxes, you can claim the student loan interest deduction without having to itemize your deductions. The interest you deduct must be for a qualified student loan you used to pay higher education tuition and fees.
You must use money from the loan to pay for educational expenses for you, your spouse or a dependent. If someone else claims you as a dependent, you file your tax return using the married filing separately status or your modified adjusted gross income is less than the annual limit the IRS allows for your filing status, you may not claim the student loan interest deduction.
As long as you paid $600 or more of interest on a qualified student loan, your student loan lender will provide you with a Form 1098-E, Student Loan Interest Statement. You can deduct up to $2,500 you paid in interest for the year.
Whether you are applying for a loan or want to find out more about tax deductions for which you may qualify, the professionals at Bell Financial Services, LTD can help you.