Co-signing a home or car loan is a big decision that impacts your life dramatically. As a co-signer, you accept responsibility for the full amount of the borrower's debt if he is unable to pay it himself. However, unless you actually make some of the payments, you can't take any tax deductions for a loan you have co-signed.
Taxpayers with mortgages can typically deduct the interest they pay during the year and the cost of their property taxes. If the taxpayer obtained the mortgage during the tax year, he may also be able to deduct prepaid mortgage interest from his taxable income. Taxpayers with car loans cannot deduct interest. However, they may be able to claim a deduction for the sales tax paid on the car, even if they paid the tax using funds from the loan.
To deduct mortgage interest paid on a loan you co-signed, you must have paid the interest directly to the mortgage company yourself. You cannot deduct any interest the primary borrower or any other individual paid, nor can you deduct any interest the primary borrower paid with funds they received from you. Likewise, if you co-signed a car loan, you can take a deduction for sales tax only if you actually paid the tax yourself.
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Claiming a Deduction
If you paid home mortgage interest on a loan you co-signed, you can claim the amount you paid on line 13 of Schedule A, which accompanies Form 1040. Likewise, if you co-signed a car loan, you can deduct any sales tax you paid as long as you itemize your deductions. Claim the sales tax deduction on line 5 of Schedule A. To claim either of these deductions, you must itemize your deductions, which is only worthwhile if the total exceeds the standard deduction you are entitled to.
The Internal Revenue Service allows taxpayers to deduct either sales tax or income taxes paid to other taxing authorities for the same year. If you deduct sales tax for a car, you cannot deduct any income taxes you paid to state or local governments. Regardless of whether you are a co-signer or a primary borrower, you cannot deduct principal you paid on any loan from your taxable income.
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