I did the following rough calculation on the potential benefits of taking out a home equity loan in order to pay down a student loan (of size $113,000). We cannot deduct student loan interest because our household income is too high.==>Correct;to claim it, Your Modified Adjusted Gross Income should be below the upper threshold specified by the IRS.
So an accountant mentioned the possibility of taking out a home equity loan (HEL) and deducting the interest from that HEL loan.
Assuming a 3.85% HEL interest rate, and a HEL loan of size $113,000, to be paid back over 15 years. Total yearly HEL interest, potentially tax deductible, is about $4,200. Assuming our top income tax rate is 28%, we save $4,200*.28=$1,176 on our taxes.===>>Correct.
We are losing about 3.85-2=1.85% in interest rate, since the student loans have a 2% interest rate. A 15-year loan of $113,000 at 1.85% has a yearly payment (int+principal) of $8,628 per year. That is a big loss that largely offsets the tax savings.======>it depends. HEL secured by your main home or a second home qualify for the home mortgage interest deduction. Mortgages include a mortgage to buy your home, a second mortgage, a line of credit or a home equity loan. So, You
need to subtract principal expense from the amt of $8,628.Also asyou can see, aslongas you itemize deductions on Sch A of 1040, you can claim your mortgage loan interest expenses. UNLESS you itemize deductions, you can not claim mortgage interest expenses.
Is there anything wrong with my thinking?====>>As mentioned above.