Tax Shelter Strategies for Interest Deductions

A long time ago, the internal Revenue Service permitted tax payers to deduct all of their interest costs - including personal credit card debt. Then Congress changed the tax code, and today, you can solely deduct particular kinds of interest. And that is the type you want to have. However, some tax shelter strategies might help categorize more of your interest to make it deductible.

The most obvious deduction is your mortgage: You can deduct interest on up to $1 million of mortgages utilized to acquire or improve your primary residence and one other house. However watch out in case you have a high adjusted gross income (AGI), in which situation your home loan interest write-off might be phased out. For 2010 - 2012, there is no phase-out but if this tax break isn't expanded, careful tax shelter strategies is needed as up to 80% of the deduction might be eliminated for high income taxpayers.

You can also deduct interest on home equity loans totaling up to $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 financial debt as well as your first mortgage combined cannot exceed the fair market worth of the property.

And don't ignore holiday homes in your tax shelter strategies. This may go with out saying, simply because for many individuals, a holiday home is really a 2nd home, and as mentioned above, the home loan interest on a second home is tax-deductible. But it is worth indicating, because if you rent out the vacation home part of the time, the tax guidelines may be confusing. Correct tax shelter strategies will get your much more deductions for a vacation home that is rented out more than 2 weeks yearly.

You cannot deduct interest on car loans, credit cards and other consumer debt. Nevertheless, smart tax shelter strategies will have you can take out a home equity loan and make use of the money to, say, pay off credit card balances or buy a automobile - which would make the interest deductible. This could potentially be a good debt management technique, with 1 caveat: The interest on house equity loans is deductible for alternative minimum tax (AMT) functions only if you use the proceeds to obtain, build or enhance a primary or second residence. Which means that if you take out a $25,000 house equity mortgage to buy a new automobile, you can deduct the interest under the normal tax rules, although not under the AMT tax rules. However, if you spend the $25,000 to renovate your basement, you are able to deduct the interest under both the normal tax regulations and AMT tax regulations.

Some other tax shelter strategies include utilizing home equity finance a business in which situation the above restriction do not apply because the interest will be business interest. Similarly, intelligent tax planning will have you utilize funds in a way that can't be tracked as per the above use of home equity to buy a vehicle. If you tap house equity, make use of These funds for a valid non-AMT objective (re-carpeting the home) and use OTHER cash for the new automobile.