We all take out loans at different times of our lives for different reasons. Maybe you’re embarking on a college education and took out student loans to help you pay for it. Or you just bought your first home and now have a mortgage. Or maybe you borrowed money to make an investment that will eventually make you money. All of these types of loans will charge you interest, and that interest can be used to reduce your tax bill.
Student Loan Interest
Paying for higher education is expensive, but one way to save some money on it is through your taxes. You can take up to $2,500 of student loan interest that you paid throughout the year as an adjustment to your income. This is not an itemized deduction, so it can be taken regardless of whether you are itemizing or taking the standard deduction. However, there are modified adjusted gross income (MAGI) limits for this deduction based on your filing status.
Interest Paid as an Itemized Deduction
Other interest paid by you throughout the year can be taken as an eligible itemized deduction. These include:
- Mortgage Interest: If you have a mortgage on your first or second home, and that loan uses the home as collateral, you can deduct the interest (and any points you paid) from your taxes. The limit is up to a $750,000 loan if you’re single, married filing jointly, or head of household. If you’re married filing separately, the limit is up to a $375,000 loan.
- Home Equity Loan: If you get a home equity loan to buy, build, or improve the home that secures the loan, then you can deduct the interest. If you take out the loan for other purposes, such as paying for your next vacation, you can’t deduct the interest.
- Investment interest: Investment interest is interest paid on a loan to buy property held for investment. That property must produce investment income, such as interest, dividends, annuities, or royalties. This includes interest on margin accounts to buy taxable securities. Your investment interest deduction is limited to the amount of your net investment income.
Interest Paid That Is Not Deductible
If you decide to take the standard deduction this year, you will only be able to deduct student loan interest as an adjustment to income. Other interest paid that is not deductible includes interest on personal loans, credit cards, and car loans. If you accrued interest on an investment that is considered a passive activity (a business you are not actively involved in), you can’t take that interest paid as a deduction either.
Paying interest on certain types of loans can save you money at tax time. Reach out to one of our tax preparers to find out more.