When you co-sign for a loan, your voluntary acceptance of third-party debt may entitle you to specific tax deductions. This can work in your favor if you are seeking to reduce your annual tax burden and save money over the long haul. Depending upon the specific type of loan you have co-signed for, you could be able to earn deductions for any interest you have paid toward the principal of the loan. Student loans and mortgages are two of the most common forms of co-signer deductions.
Understanding Student Loan Deductions
Paying for higher education can be a huge burden for many families. Fortunately, if you’re a co-signer on a student loan, the IRS allows you to deduct some of the interest you paid on the loan when you go to file your federal income taxes. For the 2020 tax year, you can either deduct up to $2,500 or the amount you paid in interest for the year for a qualifying student loan, whichever is less.
But, in true IRS fashion, you must meet certain requirements before you’re eligible to take this deduction. For example, you must have paid the interest on a qualified loan, it must be your legal obligation to pay the interest on the loan, you cannot file taxes using the married filing separately status, your modified adjusted gross income must be less than certain limits and lastly, you (or your spouse if filing jointly) cannot be claimed as dependents on another person's income tax return.
Claiming the Student Loan Deduction
It is worth noting that this deduction is subject to gradual phase-out if your modified adjusted gross income, or MAGI, is between $70,000 and $85,000 for single filers, and between $140,000 and $170,000 when filing jointly. This deduction completely phases out if your MAGI is more than $85,000 when filing singly and $170,000 when filing a joint return.
To claim this deduction, you must itemize on the Schedule A of IRS Form 1040. Unless you have other itemized deductions you can take, it may be more advantageous for you to go with the standard deduction. The standard deduction is $12,400 for single filers and $24,800 when filing jointly in 2020.
Understanding Mortgage Deductions
Another co-signer tax deduction you can take is for the interest related to mortgages. However, you may only deduct the interest you paid yourself. There is some confusion surrounding co-owners and co-signers. When you are listed as a co-signer on someone’s home loan, this does not mean you are automatically listed on the home’s title; instead, you are listed only on the mortgage paperwork unless you are specifically added to the title.
For instance, if you co-sign on a home loan for your daughter, but she pays all of the taxes, insurance and mortgage payment then you would not be able to deduct anything if you are not on the title itself. But, if you are a co-owner of the property on the title and directly pay toward the interest on the loan, then you may be eligible to take a deduction, if other requirements are met.
Typically, all of the interest you pay on a mortgage is deductible. But, the amount you can deduct depends on the amount of the mortgage, how the mortgage proceeds are used and when the mortgage was acquired. The IRS' website has a useful flowchart on IRS Publication 936, Home Mortgage Interest Deduction, that helps you determine whether the total amount of your mortgage interest is fully deductible, as well as other conditions and requirements that must be met before taking this deduction.
- IRS: Topic Number 456 - Student Loan Interest Deduction
- IRS: Publication 936 (2019), Home Mortgage Interest Deduction
- IRS: Publication 970 (2019), Tax Benefits for Education
- Internal Revenue Service. "Topic No. 456 Student Loan Interest Deduction." Accessed July 9, 2020.
- Internal Revenue Service. "2019 Publication 970: Tax Benefits for Education," Page 33. Accessed July 9, 2020.
- Internal Revenue Service. "2020 Form 1098-E," Page 4. Accessed July 9, 2020.
- Internal Revenue Service. "2019 Publication 970: Tax Benefits for Education," Page 32. Accessed July 9, 2020.
- Internal Revenue Service. "2019 Publication 970: Tax Benefits for Education," Page 34. Accessed July 9, 2020.
- Internal Revenue Service. "2019 Publication 970: Tax Benefits for Education," Pages 35-36. Accessed July 9, 2020.
- Internal Revenue Service. "2019 Publication 970: Tax Benefits for Education," Page 36. Accessed July 9, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.