As spring approaches, so does tax season. To reduce what you owe—or increase your return—taxpayers should look for applicable deductions. For example, while not all the interest you pay is tax-deductible, some kinds are, as the guide below explains.
What to Know About Claiming Interest Expenses
What is interest?
Interest is a fee you pay for borrowing money from a financial institution. Your monthly loan payments are comprised of the principal, which is the amount you borrowed, plus interest.
The interest you pay can be fixed or variable depending on the lending terms—and is determined by the type and amount of the loan, your credit score, and the current financial market.
What are itemized & standard deductions?
Deductions lower your taxable income and, therefore, the amount of taxes you have to pay. There are two types of deductions: standard and itemized.
A standard deduction is a fixed amount set by the IRS. The amounts for 2019 are:
- Single or Married Filing Separately – $12,200
- Head of Household – $18,350
- Married Filing Jointly – $24,400
Itemized deductions are comprised of eligible expenses you’ve made throughout the year. Some types of interest qualify as an itemized deduction.
For your personal income taxes, you’ll choose whichever method lowers your taxable income the most.
Which types of interest are tax-deductible?
According to the IRS, the two types of interest that qualify for itemized deductions are qualified mortgage and investment interest. Mortgage interest is the interest you’ve paid on your home loan. Investment interest is comprised of interest on loans you took out to purchase taxable investments.
You may also qualify for an income tax credit if a Mortgage Credit Certificate has been issued to you by the state or federal government for low-income housing.
Some people who meet income-eligibility requirements can deduct up to $2,500 of student loan interest paid during the tax year.
If you run a business you may also be eligible for the following interest expense deductions: farm business interest, non-farm business interest, and interest used to produce royalties or rents.
Which types of interest are exempt?
Unfortunately, the interest you’ve paid on personal installment loans, personal vehicles, and credit cards won’t qualify as deduction or credits.
If you’re looking for an experienced and knowledgeable accountant to prepare your income taxes, contact Donna Sellers CPA. Serving the Brownfield, TX, area for over 20 years, she assists both individual and commercial clients. She is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. You can visit her website for more on her offerings or call (806) 637-8556 to set up a free consultation.