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4 Ways to Deduct Interest on Your Tax Return

4 Ways to Deduct Interest on Your Tax Return - TaxACT

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

It’s not the only type of deductible interest, however. If you look a little further, you may find other types of interest that can save 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 different ways.

Mortgage interest deduction

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

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

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

Your “second home” can be a beach house or cabin in the woods – if you’re so lucky. But it can also be a mobile home, house trailer, boat, or similar property that has sleeping, cooking and toilet facilities.

However, in some cases, deductions on the property are limited.

For example, home acquisition debt is the mortgage you took out to buy or refinance the home. Any interest on that amount up to a $1,000,000 ($500,000 if married filing separately) can be deducted.

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

For home equity debt or other loans taken out after you own a property, interest on a balance up to $100,000 ($50,000 if married filing separately) is deductible.

Home office expenses

If you take a home office deduction, you can include part of your home mortgage expenses in that amount.

While home mortgage interest can be deducted on Schedule A, that may not be the best use of the deduction. In many cases, taking it as a business expense is a better deal.

Adding to your total itemized deductions lowers your business taxable income.

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 can’t 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 a portion for personal reasons, you must divide the debt between personal and investment.

Deduct any investment interest expenses with other miscellaneous itemized deductions on Schedule A.

Your total miscellaneous itemized deductions are deductible to the extent they exceed 2 percent of your adjusted gross income.

Business expenses

Always report expenses related to your business with the business activity on your tax return.

For example, report mortgage interest on a house on Schedule E with your rental activity.

Additionally, deduct any interest expenses on a business loan or credit card with your business activity.

Generally, it’s more beneficial to deduct interest expenses with your business activity because business interest reduces your adjusted gross income and your income subject to self-employment tax.

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About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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