Interest Deductions for Your Federal Income Taxes

Interest deductions are one of the most closely scrutinized items on your tax returns so you need to be careful when it comes to deducting interest from your taxable income. Keep in mind that not all interest expenses are deductible so it is very important to be able to distinguish what can be deducted and what cannot be deducted. Below are some of the types of interests that can be deducted from your federal income tax.

Home Mortgage Interest

There are two types of home mortgage interest that can be deducted from your income tax; the interest on your home loan and the interest on home equity debt. The mortgage interest must come from loans taken against your primary residence or second home. As a general rule, home equity loans can be used for anything. However, it is not important how you use the money from the line of credit, instead, the fact that you use your home as security for the loan is the reason for the deduction.

Home mortgage interest tax deductions have limitations. According to IRS rules, accrued home loan interest may be deducted from your federal income taxes. You can only claim deductible mortgage interest for your primary residence. If you use a portion of your home as your office or if you rent out some parts of your home, you cannot claim tax deductions for the entire mortgage interest that you incur on your home. You will need to estimate the amount that is used for work purposes. Then, divide the work amount to determine a percentage and use it to calculate your eligible interest. Your mortgage lender will provide you with a yearly interest statement that will help you determine your overall interest for the year.

Student Loan Interest

Student loan interest can be deducted from your taxable income so make sure that you keep track of the interest you incurred on this loan. Like home mortgage loan interest, student loans interest deductions have limitations. According to IRS rules, you can only deduct a maximum of $2,500 interest from your student loan interest every year. Creditors are required to provide their clients with Form 1098E showing the amount of interest you incurred for the year on your student loan. Because of this, it is relatively easy for you to keep track of your interest expenses. In order to to file claims for your student loans, you need to complete line 18 of IRS form 1040A. Read the instructions carefully before you file to avoid problems in the future.

Interest on Business Loans

If you took out a loan to pay for your business expenses, you can deduct the interest from your federal income taxes. For example, if you took a loan to buy new equipment for your business, you are allowed to claim the interest of that loan as tax deductible. To make your claim, you need to complete the appropriate lines on Schedule C associated with Form 1040.

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