Submitted By: Susan
Answered: December 9, 2015 11:48 am

I took a $4,000 loan from my 401(k) account at the end of 2014. I repaid it in full this year. Can I take a deduction for the repayment?

A repayment of principal is never deductible. Interest on the loan may be deductible, depending on what you used the proceeds for. If you purchased securities, the interest is treated as investment interest deductible as an itemized deduction to the extent of net investment income. If you used the proceeds to buy a principal residence or second home and you are not a key employee, you can usually obtain a full interest deduction if the loan is secured by the home. But if you used the proceeds for personal reasons (e.g., paying medical or college expenses), no interest deduction is allowed.

Tax Glossary

Adjusted gross income (AGI)

Gross income less allowable adjustments, such as IRA, alimony, and Keogh deductions. AGI determines whether various tax benefits are phased out, such as personal exemptions, itemized deductions, and the rental loss allowance and modified adjusted gross income (MAGI).

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