Tax Planning for Interest Deductions

A long time ago, the internal Revenue Service allowed taxpayers to deduct all of their interest charges - which includes personal credit card debt. After that Congress altered the tax code, and today, you may solely deduct particular types of interest. And that is the type you want to have. However, some tax planning can help categorize more of your interest to make it deductible.

The most evident deduction is your mortgage: You can deduct interest on up to $1 million of mortgages utilized to obtain or expand your primary residence and 1 other house. But be careful in case you have a high adjusted gross income (AGI), in which case your home loan interest write-off may be eliminated. For 2010 - 2012, there's no phase-out but if this tax break isn't extended, careful tax planning is required as up to 80% of the deduction could be eliminated for high income taxpayers.

You may also deduct interest on home equity loans totaling as much as $100,000, regardless of how you use the loan proceeds - which is above and beyond the $1 million limit just described. But, the home equity debt as well as your 1st mortgage combined can't exceed the fair market worth of the property.

And don't ignore holiday houses in your tax planning. This might go without saying, because for most individuals, a vacation house is a 2nd house, and as mentioned above, the home loan interest on a 2nd home is tax-deductible. But it is really worth mentioning, simply because in the event you rent out the vacation home part of the time, the tax guidelines can be confusing. Proper tax planning will get your much more deductions for a vacation home that is rented out more than 2 weeks yearly.

You can't deduct interest on automobile loans, credit cards and other consumer debt. Nevertheless, smart tax planning will have you can take out a home equity loan and use the cash to, say, pay off credit card balances or purchase a car - which might make the interest deductible. This might potentially be considered a good debt administration technique, with one warning: The interest on home equity loans is deductible for alternative minimum tax (AMT) functions only if you utilize the proceeds to acquire, build or improve a primary or second property. That means that in the event you get a $25,000 home equity mortgage to buy a new automobile, you can deduct the interest under the normal tax regulations, although not under the AMT tax regulations. On the other hand, if you spend the $25,000 to modernize your basement, you are able to deduct the interest under both the normal tax regulations and AMT tax rules.

Some other tax planning methods include using house equity finance a business in which situation the above restriction don't apply because the interest would be business interest. Likewise, smart tax planning will have you use funds in a method that cannot be tracked as per the over use of house equity to buy a car. If you tap house equity, use These money for a legitimate non-AMT purpose (re-carpeting the house) and utilize OTHER cash for the new car.