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H&r Block

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H&r Block

H&r block 1. H&r block   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. H&r block Generally, each year you will report all income and deduct all out-of-pocket expenses in full. H&r block The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. H&r block If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). H&r block Rental Income In most cases, you must include in your gross income all amounts you receive as rent. H&r block Rental income is any payment you receive for the use or occupation of property. H&r block In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. H&r block When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. H&r block Most individual taxpayers use the cash method. H&r block Cash method. H&r block   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. H&r block You constructively receive income when it is made available to you, for example, by being credited to your bank account. H&r block Accrual method. H&r block    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. H&r block You generally deduct your expenses when you incur them, rather than when you pay them. H&r block More information. H&r block   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. H&r block Types of Income The following are common types of rental income. H&r block Advance rent. H&r block   Advance rent is any amount you receive before the period that it covers. H&r block Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. H&r block Example. H&r block On March 18, 2013, you signed a 10-year lease to rent your property. H&r block During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. H&r block You must include $19,200 in your rental income in the first year. H&r block Canceling a lease. H&r block   If your tenant pays you to cancel a lease, the amount you receive is rent. H&r block Include the payment in your income in the year you receive it regardless of your method of accounting. H&r block Expenses paid by tenant. H&r block   If your tenant pays any of your expenses, those payments are rental income. H&r block Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. H&r block For more information, see Rental Expenses , later. H&r block Example 1. H&r block Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. H&r block Under the terms of the lease, your tenant does not have to pay this bill. H&r block Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. H&r block You can deduct the utility payment made by your tenant as a rental expense. H&r block Example 2. H&r block While you are out of town, the furnace in your rental property stops working. H&r block Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. H&r block Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. H&r block You can deduct the repair payment made by your tenant as a rental expense. H&r block Property or services. H&r block   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. H&r block   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. H&r block Example. H&r block Your tenant is a house painter. H&r block He offers to paint your rental property instead of paying 2 months rent. H&r block You accept his offer. H&r block Include in your rental income the amount the tenant would have paid for 2 months rent. H&r block You can deduct that same amount as a rental expense for painting your property. H&r block Security deposits. H&r block   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. H&r block But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. H&r block    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. H&r block Include it in your income when you receive it. H&r block Other Sources of Rental Income Lease with option to buy. H&r block   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. H&r block If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. H&r block Part interest. H&r block   If you own a part interest in rental property, you must report your part of the rental income from the property. H&r block Rental of property also used as your home. H&r block   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. H&r block However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. H&r block See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). H&r block Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. H&r block Personal use of rental property. H&r block   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. H&r block Also, your rental expense deductions may be limited. H&r block See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). H&r block Part interest. H&r block   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. H&r block Example. H&r block Roger owns a one-half undivided interest in a rental house. H&r block Last year he paid $968 for necessary repairs on the property. H&r block Roger can deduct $484 (50% × $968) as a rental expense. H&r block He is entitled to reimbursement for the remaining half from the co-owner. H&r block When To Deduct You generally deduct your rental expenses in the year you pay them. H&r block If you use the accrual method, see Publication 538 for more information. H&r block Types of Expenses Listed below are the most common rental expenses. H&r block Advertising. H&r block Auto and travel expenses. H&r block Cleaning and maintenance. H&r block Commissions. H&r block Depreciation. H&r block Insurance. H&r block Interest (other). H&r block Legal and other professional fees. H&r block Local transportation expenses. H&r block Management fees. H&r block Mortgage interest paid to banks, etc. H&r block Points. H&r block Rental payments. H&r block Repairs. H&r block Taxes. H&r block Utilities. H&r block Some of these expenses, as well as other less common ones, are discussed below. H&r block Depreciation. H&r block   Depreciation is a capital expense. H&r block It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. H&r block   You can begin to depreciate rental property when it is ready and available for rent. H&r block See Placed in Service under When Does Depreciation Begin and End in chapter 2. H&r block Insurance premiums paid in advance. H&r block   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. H&r block You cannot deduct the total premium in the year you pay it. H&r block See chapter 6 of Publication 535 for information on deductible premiums. H&r block Interest expense. H&r block   You can deduct mortgage interest you pay on your rental property. H&r block When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. H&r block Chapter 4 of Publication 535 explains mortgage interest in detail. H&r block Expenses paid to obtain a mortgage. H&r block   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. H&r block These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. H&r block Form 1098, Mortgage Interest Statement. H&r block   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. H&r block If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. H&r block Attach a statement to your return showing the name and address of the other person. H&r block On the dotted line next to line 13, enter “See attached. H&r block ” Legal and other professional fees. H&r block   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. H&r block For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. H&r block You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. H&r block Local benefit taxes. H&r block   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. H&r block These charges are nondepreciable capital expenditures and must be added to the basis of your property. H&r block However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. H&r block Local transportation expenses. H&r block   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. H&r block However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. H&r block See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. H&r block   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. H&r block For 2013, the standard mileage rate for business use is 56. H&r block 5 cents per mile. H&r block For more information, see chapter 4 of Publication 463. H&r block    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. H&r block In addition, you must complete Form 4562, Part V, and attach it to your tax return. H&r block Pre-rental expenses. H&r block   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. H&r block Rental of equipment. H&r block   You can deduct the rent you pay for equipment that you use for rental purposes. H&r block However, in some cases, lease contracts are actually purchase contracts. H&r block If so, you cannot deduct these payments. H&r block You can recover the cost of purchased equipment through depreciation. H&r block Rental of property. H&r block   You can deduct the rent you pay for property that you use for rental purposes. H&r block If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. H&r block Travel expenses. H&r block   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. H&r block You must properly allocate your expenses between rental and nonrental activities. H&r block You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. H&r block The cost of improvements is recovered by taking depreciation. H&r block For information on travel expenses, see chapter 1 of Publication 463. H&r block    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. H&r block Uncollected rent. H&r block   If you are a cash basis taxpayer, do not deduct uncollected rent. H&r block Because you have not included it in your income, it is not deductible. H&r block   If you use an accrual method, report income when you earn it. H&r block If you are unable to collect the rent, you may be able to deduct it as a business bad debt. H&r block See chapter 10 of Publication 535 for more information about business bad debts. H&r block Vacant rental property. H&r block   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. H&r block However, you cannot deduct any loss of rental income for the period the property is vacant. H&r block Vacant while listed for sale. H&r block   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. H&r block If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. H&r block Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. H&r block These charges are also called loan origination fees, maximum loan charges, or premium charges. H&r block Any of these charges (points) that are solely for the use of money are interest. H&r block Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. H&r block The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. H&r block In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). H&r block The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. H&r block If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. H&r block De minimis OID. H&r block   The OID is de minimis if it is less than one-fourth of 1% (. H&r block 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). H&r block   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. H&r block On a constant-yield basis over the term of the loan. H&r block On a straight line basis over the term of the loan. H&r block In proportion to stated interest payments. H&r block In its entirety at maturity of the loan. H&r block You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. H&r block Example. H&r block Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. H&r block The loan is to be repaid over 30 years. H&r block During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. H&r block When the loan was made, she paid $1,500 in points to the lender. H&r block The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. H&r block Carol determines that the points (OID) she paid are de minimis based on the following computation. H&r block Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. H&r block 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). H&r block Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. H&r block Under the straight line method, she can deduct $50 each year for 30 years. H&r block Constant-yield method. H&r block   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. H&r block   You figure your deduction for the first year in the following manner. H&r block Determine the issue price of the loan. H&r block If you paid points on the loan, the issue price generally is the difference between the principal and the points. H&r block Multiply the result in (1) by the yield to maturity (defined later). H&r block Subtract any qualified stated interest payments (defined later) from the result in (2). H&r block This is the OID you can deduct in the first year. H&r block Yield to maturity (YTM). H&r block   This rate is generally shown in the literature you receive from your lender. H&r block If you do not have this information, consult your lender or tax advisor. H&r block In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. H&r block Qualified stated interest (QSI). H&r block   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. H&r block Example—Year 1. H&r block The facts are the same as in the previous example. H&r block The yield to maturity on Carol's loan is 10. H&r block 2467%, compounded annually. H&r block She figured the amount of points (OID) she could deduct in 2013 as follows. H&r block Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . H&r block 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. H&r block To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. H&r block Then follow steps (2) and (3), earlier. H&r block Example—Year 2. H&r block Carol figured the deduction for 2014 as follows. H&r block Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . H&r block 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. H&r block    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. H&r block A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. H&r block However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. H&r block Points when loan refinance is more than the previous outstanding balance. H&r block   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. H&r block For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. H&r block Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. H&r block Improvements. H&r block   You must capitalize any expense you pay to improve your rental property. H&r block An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. H&r block Betterments. H&r block   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. H&r block Restoration. H&r block   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. H&r block Adaptation. H&r block   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. H&r block Separate the costs of repairs and improvements, and keep accurate records. H&r block You will need to know the cost of improvements when you sell or depreciate your property. H&r block The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. H&r block Table 1-1. H&r block Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
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The H&r Block

H&r block 5. H&r block   Student Loan Cancellations and Repayment Assistance Table of Contents Introduction Student Loan CancellationQualifying Loans Student Loan Repayment Assistance Introduction Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes. H&r block However, if you fulfill certain requirements, two types of student loan assistance may be tax free. H&r block The types of assistance discussed in this chapter are: Student loan cancellation, and Student loan repayment assistance. H&r block Student Loan Cancellation If your student loan is canceled, you may not have to include any amount in income. H&r block This section describes the requirements for tax-free treatment of canceled student loans. H&r block Qualifying Loans To qualify for tax-free treatment, for the cancellation of your loan, your loan must have been made by a qualified lender to assist you in attending an eligible educational institution and contain a provision that all or part of the debt will be canceled if you work: For a certain period of time, In certain professions, and For any of a broad class of employers. H&r block The cancellation of your loan will not qualify for tax-free treatment if it is cancelled because of services you performed for the educational institution that made the loan or other organization that provided the funds. H&r block See Exception, later. H&r block Eligible educational institution. H&r block   This is an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. H&r block Qualified lenders. H&r block   These include the following. H&r block The United States, or an instrumentality thereof. H&r block A state, territory, or possession of the United States, or the District of Columbia, or any political subdivision thereof. H&r block A public benefit corporation that is tax-exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose employees are considered public employees under state law. H&r block An eligible educational institution, if the loan is made: As part of an agreement with an entity described in (1), (2), (3) under which the funds to make the loan were provided to the educational institution, or Under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization. H&r block   Occupations with unmet needs include medicine, nursing, teaching, and law. H&r block Section 501(c)(3) organization. H&r block   This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes. H&r block Charitable. H&r block Religious. H&r block Educational. H&r block Scientific. H&r block Literary. H&r block Testing for public safety. H&r block Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment). H&r block The prevention of cruelty to children or animals. H&r block Exception. H&r block   The cancellation of your loan does not qualify as tax-free student loan cancellation if your student loan was made by an educational institution and is canceled because of services you performed for the educational institution or other organization that provided the funds. H&r block Refinanced Loan If you refinanced a student loan with another loan from an eligible educational institution or a tax-exempt organization, that loan may also be considered as made by a qualified lender. H&r block The refinanced loan is considered made by a qualified lender if it is made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization. H&r block Student Loan Repayment Assistance Student loan repayments made to you are tax free if you received them for any of the following: The National Health Service Corps (NHSC) Loan Repayment Program (NHSC Loan Repayment Program). H&r block A state education loan repayment program eligible for funds under the Public Health Service Act. H&r block Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in under served or health professional shortage areas (as determined by such state). H&r block You cannot deduct the interest you paid on a student loan to the extent payments were made through your participation in the above programs. H&r block Prev  Up  Next   Home   More Online Publications