Tax Treatment of Interest Paid on Co-Signed Loans

There are many reasons why people co-sign loans. Several people may buy a piece of property together, or parents may co-sign a student loan with their child, for example. Of course, practically every loan includes interest payments, and you may end up repaying hundreds or thousands of dollars more than you actually borrowed.

The upside: Interest paid on these loans may be tax deductible. But who gets the deductions when there are co-signers? The IRS has some special rules.

Student Loans

The IRS treats interest paid on student loans differently than interest paid on other loans. Unlike other loans, student loan interest isn't itemized on your tax return. In other words, it can be deducted whether or not you itemize or use the standard deduction.

To qualify for the deduction for the 2010 tax year, your modified adjusted gross income must be less than $75,000 or $150,000 if filing jointly. The amount of the deduction is $2,500 or the amount of interest paid, whichever is less.

The interest can only be deducted if the student is:

  • The taxpayer who took out the loan
  • The taxpayer's spouse
  • The taxpayer's dependent

Students who are dependents on their parents' tax return can't deduct the interest expense on their tax return. So, if the parents and student co-sign a student loan, only the student can take the deduction if the student isn't claimed as a dependent on the parents' return. If the student is claimed as a dependent, only the parents may take the deduction.

Mortgage Interest

Under IRS rules, interest paid on mortgages and other loans is deductible if the taxpayer itemizes deductions. For most mortgages and taxpayers, the entire amount of mortgage interest is deductible.

When you and one or more people co-sign a mortgage loan, you (and the others) may only deduct interest you actually paid on the loan.

For example, if you and Taxpayer A co-sign a loan but Taxpayer A makes 100 percent of the payments, then only Taxpayer A may deduct the interest. If Taxpayer A makes 30 percent of the payments and you make 70 percent, then Taxpayer A may deduct 30 percent of the interest and you may deduct 70 percent.

If you both make 50 percent of the payments, but only Taxpayer A itemizes deductions, then only Taxpayer A may deduct the interest expense (and can only deduct what she actually paid, 50 percent).

Questions for Your Attorney

  • Can I itemize interest paid on student loans for my federal taxes?
  • If I took out loans to go college, can I deduct the interest that I paid on the loans?
  • If my father and I co-signed college loans, how much of the interest can I deduct on my taxes?
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