Debt is not always a bad thing. Without it, most people wouldn’t be able to attend college, buy a house or car, etc. Overall, however, debt is something most people avoid, and hope to eradicate when they have it. If there’s one “bright side” to debt, it’s that some kinds are tax deductible. Here’s what you should know about that.
What with inflation and an economy that’s still adjusting to the ebb and flow of an ongoing pandemic, many people are seeking to keep up their consumer debt payments and, where possible, lower their debt load to manageable levels. In the main, that involves reigning in spending. But you can also use tax laws to shrink your debts.
Debts and Tax Deductions
Your debt is either tax-deductible – or not. Typically, mortgage interest is tax deductible, as is interest paid on student loans and cash borrowed to purchase investment property. However, starting in 2018, interest paid on home equity debt can no longer be deducted unless it’s used to purchase, construct, or significantly improve your home. Further, there are caps on the total amount of debt that the interest is on that’s eligible for deduction. Note, too, that the interest that you pay on vehicle loans or credit cards cannot be deducted.
Homeowners get tax breaks upon their home purchase, during ownership, and when the home is sold. If you use your tax breaks or tweak your tax withholding, you’ll have more cash each month to put on your debts. The same is true if you’re self employed if you scale back on your approximated tax payments.
Purchasing a home usually comes with a veritable cornucopia of tax breaks in the form of itemized deductions. Last year, for example, the basic standard deduction was $12,550; $18,800 for heads of households. The standard deduction for married couples filing jointly was $25,100.
Once you begin itemizing your deductions, you likely can shrink your tax bill further by writing off state income taxes and charitable contributions, and maybe even medical bills. This gives you more cash to put on debts and is among Freedom Debt Relief’s tips for Texans, who are increasingly struggling with debt caused by high credit card utilization, compared with the national average. Indeed, tax tips for Texans are highly sought right now.
During home ownership, you can borrow against your equity, choosing between a loan for a fixed amount or a line of credit. Note that whether interest paid on home equity loans is tax deductible is subject to specific rules.
When you sell your home, a maximum of $250,000 of profit is tax free. That number rises to $500,000 for married couples filing jointly. If you’re trying to find money to pay off debts, downsizing to a less-pricey home is one way to get it, particularly if you’re retired.
Yes, the cost of a college education has been spiraling upward for some time now. However, you can deduct a maximum of $2,500 in the interest you shell out for certain education loans for college expenses, subject to income limits. Last year, those limits were between $70,000 and $85,000 for individuals and between $140,000 and $170,000 for couples who filed jointly.
In most cases, the interest you pay on borrowed money is tax deductible – IF the investment aims to produce taxable income. The interest is not deductible, however, if the borrowed monies are used to invest in tax-exempt securities. The same goes for loans to purchase an annuity or single-premium life insurance policy. The legislature doesn’t want the Internal Revenue Service subsidizing loans so that you can buy tax-friendly investments.
So, in summary, the kinds of debts that are tax deductible varies and runs the gamut. If you take advantage of such deductions, you’ll free up cash to pay down your debts. If you have questions about what’s deductible, talk to a tax attorney or accounting professional.
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