Tax Strategies for Interest Deductions

Several years ago, the internal Revenue Service permitted taxpayers to deduct all of their interest charges - including the interest on personal credit card debt. Then Congress changed the tax code, and today, you can only deduct certain types of interest (and credit card debt is no longer one of them). So if you are going to pay interest, you want that interest in the categories that IRS deems deductible. Note: interest is deductible only for those who itemize deductions and not for those who use the standard deduction on their tax return.

The most obvious deduction is your house loan: You are able to deduct interest on as much as $1 million of mortgages used to acquire or improve your main residence and 1 other home (e.g. vacation property). However, be careful in case you have a high adjusted gross income (AGI), in which case your mortgage interest write-off might be eliminated. For 2010 - 2012, there is no phase-out but if this tax break isn't expanded, careful tax strategies is needed as up to 80% of the deduction could be phased out for high income tax payers.

You can also deduct interest on home equity loans totaling up to $100,000, regardless of how you make use of the loan proceeds - which is above and beyond the $1 million limit just explained. But, the home equity debt as well as your 1st home loan mixed cannot exceed the fair market worth of the house. Note that if you borrowed against your home and used that money in your business or to start a business, you can classify this as business interest which is 100% deductible without limit.

And do not forget about vacation homes in your tax strategies. This may go without saying, because for most people, a vacation home is a second home, and as mentioned above, the mortgage interest on a 2nd home is tax-deductible. But it is really worth indicating, because in the event you rent out the vacation home part of the time, the tax guidelines can be complicated. Proper tax strategies will get your more deductions for a vacation home that's rented out more than 2 weeks yearly. In other words, a rented vacation home becomes a business and a higher level of deduction is permitted.

You cannot deduct interest on automobile loans, credit cards and other consumer debt. Nevertheless, smart tax 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 car - which might make the interest deductible. This could potentially be considered a great debt management strategy, with this warning: The interest on home equity loans is deductible for alternative minimum tax (AMT) purposes as long as you utilize the proceeds to acquire, construct or enhance a primary or second residence. Which means that if you take out a $45,000 house equity loan to purchase a brand new automobile, you are able to deduct the interest under the regular tax rules, but not under the AMT tax rules. However, if you spend the $45,000 to replace your roof or remodel the kitchen, you are able to deduct the interest under both the normal tax rules and AMT tax regulations.

Other tax strategies include using home equity finance a business in which situation the above restriction don't apply because the interest would be business interest. Likewise, smart tax strategies will have you use money in an approach that cannot be traced as per the above use of house equity to purchase a car. In the event you tap home equity, use These money for a valid non-AMT objective (re-carpeting the house) and utilize OTHER cash for the brand-new car. If the preceding paragraph is not clear, please show it to your accountant or financil advisor for a detailed example.