College is just around the corner for many. This comes with a lot of financial responsibility. The student has to have enough money to live so many students are looking into their different options like tenant loans from GuarantorLoans.com and other to try and support themselves, the parents need to ensure they pay the tuition, and the student needs to become more financially independent by learning about budgeting and credit cards for building credit. Tuition fees change college to college and paying for tuition and college expenses may require borrowing money. With this being said, this then may come as no surprise to find that some students may opt into getting Texas payday loans online, for example, to fund their education. If you are in this situation, here are some tax implications to consider before taking out a loan.

There are two possible types of loans that can generate a tax deduction for the interest paid: home equity loans and education loans. Each has its own special rules and limitations:

  • Education Loan– An education loan can be almost any type of loan as long as it is a single-purpose loan; i.e., proceeds are only used for qualified educational purposes. The most commonly thought of education loan is a government-guaranteed student loan, but one could even use a credit card if the card was only used for qualified educational purposes. Probably not a good choice, however, since the interest on credit cards is so high.

Interest in this category is an above-the-line deduction-meaning you don’t have to itemize your deductions to claim this benefit, provided the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. However, the maximum interest deduction per year is $2,500, and the deduction phases out for higher-income married taxpayers with an AGI between $130,000 and $160,000. For singles, the phase-out range is between $65,000 and $80,000. (These are the 2014 ranges; call for the values for other years.)

While loans from relatives or a qualified employer plan are also potential borrowing sources, the interest paid on these loans will not qualify as deductible education interest. If you’re just looking for some additional funds to help you get by while you conduct your studies, you might to take a closer look at something like car title loans (https://qikcartitleloans.com/) to help you unlock some of the existing value tied up in your vehicle.

  • Home Equity Loan– If you itemize your deductions and have sufficient equity in your home, you might consider borrowing the needed cash from your home. Generally, homeowners can take $100,000 of equity debt on their home and still deduct the interest paid on the loan against the regular tax. Unfortunately, the interest on equity debt is not deductible against the Alternative Minimum Tax (AMT), so consider other alternatives first if you are subject to the AMT. However, even if you are subject to the AMT, your best option may still be taking equity from your home. You may lose the benefit of the interest deduction, but the low interest rate on home loans is still in your favor.

Generally, the borrowed funds must be used for qualified expenses within a reasonable period of time, usually 90 days before or after borrowing the funds. A home equity line of credit can be used to meet these requirements by paying education expenses as they become due, provided the loan is not also used for another purpose.

If you are considering tapping a retirement account to pay for education expenses, explore all other options first. Retirement account distributions are generally taxable and subject to early withdrawal penalties if you are under retirement age, generally 59 1/2.

Please call this office to discuss your education loan options, especially if you are considering tapping a retirement account.