What Type of Interest Charges Are Tax Deductible?

Andrea Miller
Expert Contributor
Last Updated:
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When you file your annual tax return, you may be able to save money by deducting the interest you pay on certain types of debt. Here’s what taxpayers need to know about the various kinds of tax-deductible interest.

Credit Card Interest

In most cases, credit card interest is not tax-deductible. The IRS allows interest tax deductions for actions the government wants to encourage, such as purchasing homes or attending college. However, in certain circumstances, you may be able to deduct credit card interest from your taxable income.

The deductions include allowable business expenses and the credit card interest associated with these expenses. For example, if you use your credit card to buy a computer for business use, the purchase itself and interest paid on the purchase are both tax-deductible. To make it easier to track deductible purchases, you should have a separate credit card solely for business use.

Interest on Home Equity Loans and Credit Lines

If you borrow against the equity in your home either through a loan or home equity line of credit (HELOC), the interest is deductible depending on how you use the money. Eligible funds must:

  • Be used to make improvements to the home
  • Not exceed $375,000 in combination with the primary mortgage on the house ($750,000 for married couples filing jointly)

Before the passage of the Tax Cut and Jobs Act of 2017, homeowners were able to pay off high-interest credit card debt with a home equity loan. Under the new law, interest on a loan used for this purpose is no longer tax-deductible.

What Type of Interest Charges Are Tax Deductible?

If you have high-interest debt, however, using a home equity loan or line of credit may still be a smart way to save money by consolidating debt even without the tax deduction, since home equity loans are secured loans with lower interest rates.

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Other common uses for a home equity loan for which interest is no longer tax deductible include vacations, paying off student loan debt, home furnishings, and auto purchases.

Mortgage Interest Deduction

The Tax Cut and Jobs Act has also impacted how homeowners can deduct mortgage interest.

  • The cap on the mortgage interest deduction on a primary or secondary home was lowered from $1 million to $750,000 for married couples ($500,000 to $375,000 for individuals).
  • Mortgage loans taken before 12/17/2017 are still subject to the old limits.

At tax time, your mortgage lender will send you Form 1098, which details your mortgage interest paid for the year. Don’t forget to include any points paid on the purchase or refinance of your residence.

Student Loan Interest

If you are repaying student loans, you can claim up to $2,500 in interest as a deduction each year. The deducted interest amount will adjust your taxable income. To qualify, you must earn less than $80,000 during the tax year in question ($165,000 for married couples filing jointly). The loan in question must have been used to pay tuition for an accredited college or university program for a student attending at least half-time. Those with modified gross income between $65,000 and $80,000 can take only a partial deduction.

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Those who pay more than $600 in student loan interest will receive IRS Form 1098-E from their lender. This form details the interest payments and must be filed with your tax return.

Itemizing vs. Standard Deduction

You can only deduct allowable interest if you itemize your deductions. Student loan interest is an exception–you can deduct it even when you take the standard deduction.

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Many taxpayers take the standard deduction, which was increased from $12,700 to $24,000 for married couples filing jointly and from $6,350 to $12,000 for individuals.

Even if you typically itemize, it may be more advantageous to take the standard deduction for 2018. The standard deduction is higher if either you or your spouse is older than age 65.

Keep in mind that certain taxpayers must itemize deductions. Those taxpayers include:

  • Those filing separately from a spouse who is itemizing deductions
  • Those filing for fewer than 12 months because of a tax year change
  • A non-resident alien, unless he or she is married to a U.S. citizen who is taking the standard deduction and is treated as such for tax purposes.
  • Partnerships, trust funds, and estates

Use this basic calculation to determine whether you should itemize or take the standard deduction. First, add all your allowable deductions. This amount includes qualifying mortgage interest, student loan interest, and business expenses as described above. It also includes sales tax, state and local income tax, and personal property and real estate taxes, charitable gifts, disaster losses, and medical and dental expenses that exceed more than 7.5 percent of your adjusted gross income.

If these items add up to more than $12,000 if you are an individual or $24,000 if you are a married couple filing jointly, you can save on your taxes by itemizing. Otherwise, you should take the standard deduction.

Taking the standard deduction has its advantages. It makes it much faster and easier to prepare your taxes, and you can likely do so yourself to avoid paying a tax professional. The amount of the standard deduction is typically increased each year to account for the cost of living.

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Keep in mind that if you plan to itemize based on the calculation above, you’ll need to have proof of all the deductions you will claim. This proof may include receipts and other documentation. If you go this route, you may want to consult a certified public accountant to prepare your tax returns.

More information is available from IRS Tax Topic 501: Should I Itemize? Also, if you file using tax software, you can run the numbers both with and without the standard deduction to see which makes the most financial sense for you.

If you’re struggling to pay high-interest debt, get in touch with the team at Solvable. We’ll collect information about your tax, credit card, and student loan debt so we can recommend programs to help you get back in control of your finances.

 

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Andrea Miller
Expert Contributor
Last Updated: