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4 Ways to Deduct Interest on Your Tax Return

For many people, home mortgage interest is the most important tax deduction they take.

It’s not the only type of interest that can be deducted, however. If you look a little further, you may find other types of interest that can save you money on your tax return.

It’s important to know not only what interest you can deduct, but where on your return you’ll get the most benefit from the deduction.

Take a look at these four ways you may be able to deduct interest.

Mortgage interest deduction

When you take out a mortgage to buy the home in which you live, the interest you pay on that mortgage is usually deductible.

If you refinance, or take out a second mortgage or line of credit, there’s a good chance you can deduct all the interest you pay on these loans, too.

You can even deduct interest on your second home, if you have one.

Your “second home” could be your beach house or cabin in the woods, if you’re so lucky. It can just as well be a mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

Your deduction may be limited in some cases.

For home acquisition debt – the mortgage you took out to buy the home, or a refinanced mortgage – you can deduct interest on up to a $1,000,000 mortgage balance ($500,000 if married filing separately).

If you take cash out when you refinance your home, and you do not use that money to buy, build, or improve your home, you may have to treat that case as home equity debt.

For a home equity debt or other loan you take out after you own the property, you can deduct your interest on a balance of up to $100,000 ($50,000 if married filing separately).

Home office expenses

If you take a deduction for home office expenses, you can include part of your home mortgage expenses as home office expenses.

Of course, you are already deducting this interest on Schedule A as

an itemized deduction. Taking it as a business expense may be a better deal, however.

That’s because your regular mortgage interest deduction only increases your itemized deductions, lowering your taxable income.

Taking a business deduction may lower your income subject to self-employment tax, as well.

It also lowers your adjusted gross income, which can affect other tax calculations.

Investment interest

If you borrow money to make investments, you may be able to take a deduction for your interest expenses.

You cannot deduct more investment interest expense than you have in net investment income in any year, but you can carry forward any excess investment interest expense to another year.

In addition, you cannot deduct interest on money you borrowed to invest in passive activities, in straddles, or in tax-free securities as investment interest expenses.

If you borrow money and use some of it for personal reasons, and some for investments, you must allocate the debt between personal and investment purposes.

Investment interest expenses are deducted with other miscellaneous itemized deductions on Schedule A.

Your total miscellaneous itemized deductions, including investment interest expenses, is deductible to the extent it exceeds 2% of your adjusted gross income.

Business expenses

Expenses related to your business should always be reported with the business activity on your tax return.

For example, mortgage interest on a house you rent out should be reported on Schedule E with your rental activity.

Interest expenses on a business loan, or on a credit card you use for business, should be deducted with your business activity.

You generally receive more tax benefit deducting interest expenses with your business than as a regular home mortgage interest deduction on Schedule A, because business interest reduces your adjusted gross income and your income subject to self-employment tax.

Do you know how much of your monthly expense goes to pay interest expense?

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Category: Credit

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