Interest is the cost of borrowing money, and in some cases, it can be deducted from your taxable income. However, different types of interest are treated differently for tax purposes.
Deductible Interest
Certain types of interest may be deducted if you itemize deductions on your tax return, including:
Mortgage Interest & Points – Interest paid on a loan secured by your primary or second home may be deductible. Points paid when obtaining a mortgage may also qualify.
Investment Interest – Interest on loans used to invest in taxable income-generating assets.
Business-Related Interest – Interest on business, rental, or farm-related loans may be deductible under specific guidelines.
Non-Deductible Interest
Some types of personal interest cannot be deducted, such as:
Interest on personal loans, car loans, or credit cards used for personal expenses.
Points paid by a seller on behalf of a homebuyer.
Interest on loans related to tax-exempt income, such as investments in tax-free securities.
Mortgage Interest Deduction
If you have a mortgage secured by your main home or a second home, you may be able to deduct the interest paid. The loan must be used to purchase, build, or improve the home. For homes purchased after December 15, 2017, there is a limit on the amount of mortgage debt eligible for the deduction.
Mortgage Interest Credit
Some homeowners may qualify for a credit on mortgage interest if they received a Mortgage Credit Certificate (MCC) from a state or local government agency. This credit can help lower overall tax liability. However, selling the home after claiming the credit may result in a repayment requirement.
Key Takeaway
Understanding which types of interest can be deducted or credited can help reduce taxable income and save money. Be sure to check eligibility and limits when filing your tax return.