How the IRS Lets You Deduct "Free Money" (But Most People Miss It)

When it comes to tax deductions, most people think of things like mortgage interest, student loan interest, and charitable donations. But what if I told you there’s a way to deduct money you never even had to spend in the first place?

Yes, the IRS will actually let you write off certain expenses even if someone else paid for them—but only if you know where to look.

What Is This “Free Money” Deduction?

It all comes down to a simple IRS rule: If an expense is paid on your behalf, but you're legally responsible for it, you may still be able to claim the deduction.

This applies to several different situations, but here are three of the most common ways people miss out on deductions for money they didn’t even pay out of pocket.

1. Student Loan Interest Paid by Parents

Many recent college graduates don’t realize that if their parents help them by making student loan payments, they can actually deduct up to $2,500 in student loan interest—even though they didn’t make the payments themselves.

How It Works:

• Normally, you can only deduct student loan interest if you paid it yourself.

• However, if a parent (or someone else) makes payments on your behalf, the IRS treats it as if they “gifted” you the money—and you used it to pay the loan.

• As long as you're legally responsible for the loan and meet income limits ($75,000 or less for single filers, $155,000 for married filers in 2024), you can claim the deduction.

📌 Pro Tip: This only works if parents don’t claim you as a dependent. If they do, they can’t deduct the interest either—so make sure you’re filing independently!

2. Medical Expenses Paid by a Family Member

Medical expenses can be deducted if they exceed 7.5% of your adjusted gross income (AGI). But what happens if someone else—like a parent, sibling, or even a friend—pays for your medical bills?

Good News:

If the bills were for you, your spouse, or your dependents, and you were legally responsible for them, you can claim the deduction—even if someone else covered the cost.

Example:

• Your hospital bill is $10,000, but your parent covers it for you.

• You are not claimed as a dependent.

• If your income is $50,000, medical expenses over $3,750 (7.5% of AGI) may be deductible.

• Since the IRS considers the payment a gift, and you’re still legally responsible for the expense, you may be able to deduct it.

📌 Pro Tip: Keep detailed records of payments made on your behalf—just in case the IRS asks for proof!

3. Mortgage Interest Paid by Someone Else

Homeowners know they can deduct mortgage interest—but did you know that if someone else helps you with the payments, you might still be able to claim the deduction?

How This Works:

• You must be legally obligated on the mortgage (your name must be on the loan).

• Even if a relative, roommate, or significant other helps you by making payments, you can still deduct the interest portion of those payments.

• However, if their name is not on the loan, they can’t take the deduction—only the person legally responsible for the debt can.

📌 Pro Tip: If you co-own a home with someone who is not your spouse, only the person who actually makes the payments can claim the deduction—so plan accordingly!

Final Thoughts: Don’t Leave Free Money on the Table

These deductions are often overlooked because people assume they can only write off expenses they personally paid for. But if someone else helps cover your costs, the IRS may still allow you to legally claim a deduction for money you never had to spend yourself.

If any of these situations apply to you, be sure to:

✅ Keep good records of who paid what.

✅ Confirm that you’re legally responsible for the expense.

✅ Reach out if you're unsure—because missing out on free deductions is the easiest way to overpay your taxes!