Deducting Interest You Paid

Written by Milton Boothe | Posted in Tax Deductions

Certain types of interest you pay are deductible as an itemized deduction. The types of interest you can deduct on Schedule A are home mortgage interest, points in some cases, and investment interest.

Home Mortgage Interest

Home mortgage interest is the most common interest deduction on a typical Schedule A, and is any interest that you paid on a loan secured by a main home or a second home. To qualify for the home mortgage interest deduction, the following rules apply:

• You must be legally liable for the loan. Therefore, you cannot deduct interest payments you make for someone else if you are not legally liable to make those payments.
• The mortgage must be a secured debt on a qualified home.
• You can only deduct interest paid on your main home and a second home. Interest paid on third or fourth homes, for example, is not deductible.

The amount of mortgage interest you can deduct each year is limited. There is one limit for loans used to buy or build a residence (home acquisition debt), and another limit for loans not used to buy or to build a residence (home equity debt), but which is secured by your home. All loans, whether secured by your main home or your second home, are subject to the same overall limitations.

• You may not deduct interest on more than $1,000,000 of home acquisition debt for your main home and secondary residence. The limit is reduced to $500,000 if you are filing Married Filing Separately.
• You may not deduct interest on more than $100,000 of home equity debt for your main home and secondary residence. The home equity debt limit is reduced to $50,000 if you filing MFS.

Investment Interest

Investment interest expense is interest paid on money borrowed to buy property held for investment, such as interest on securities in a margin account. A taxpayer can deduct investment interest expense, but the deduction is limited to the taxpayer’s net investment income.

Deducting Business Interest

Business interest is not deductible on Schedule A as an itemized deduction, but can be deducted only on Schedule C or C-EZ. There is no limit on the amount of business interest that can be deducted.

Nondeductible Interest

The following interest and related expenses are never deductible:

• Lender’s appraisal fees.
• Preparation cost of loan papers.
• Settlement fees and notary fees.
• Service charges.
• Non-redeemable ground rent.
• Interest on income tax paid to the IRS or to a state or local tax agency.
• Annual fees on credit cards.
• Credit investigation fees.
• Interest relating to tax-exempt income.
• Interest to purchase or carry tax-exempt securities.
• Personal interest: car loans (non-business use), finance charges on credit cards and consumer loans, late payment charges by a utility.

The primary objective of this article is to empower taxpayers to learn to do their own taxes. For detailed information on your deductible interest, grab yourself a copy of “Doing Your Own Taxes is as Easy as 1, 2, 3,” ($6.98) on TaxConnections.com

Milton Boothe

Milton G Boothe is an IRS Enrolled Agent with over twenty years of tax and financial accounting experience, including several years at PricewaterhouseCoopers. He is also a British certified Chartered Accountant. He is currently employed in private tax practices where he helps people resolve their tax problems, minimize their taxes, and routinely represents the interests of taxpayers before the Internal Revenue Service. As an Enrolled Agent (EA) Boothe is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals.
Milton G Boothe is also the author of several tax publications, wherein he encourages people to empower themselves by learning to do their own taxes.