What Kinds of Debt are Tax Deductible?

Debt is not always a bad thing. Without it, most people wouldn’t be able to…

What Kinds of Debt are Tax Deductible?

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.

The Issue

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

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.

Student Loans

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.

Investments

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.  



Since you’re here …

… we have a small favour to ask. More people are reading Side-Line Magazine than ever but advertising revenues across the media are falling fast. And unlike many news organisations, we haven’t put up a paywall – we want to keep our journalism as open as we can. So you can see why we need to ask for your help.

Side-Line’s independent journalism takes a lot of time, money and hard work to produce. But we do it because we want to push the artists we like and who are equally fighting to survive.

If everyone who reads our reporting, who likes it, helps fund it, our future would be much more secure. For as little as 5 US$, you can support Side-Line Magazine – and it only takes a minute. Thank you.

The donations are safely powered by Paypal.

Select a Donation Option (USD)

Enter Donation Amount (USD)

Alternatively you can also donate using Cryptocurrency if you want to donate just once.

  • Bitcoin
  • Ethereum
  • Tether
Scan to Donate Bitcoin to 3J5Y7wgsZYFciSdagE14vaxyDQXx7Cn97b

Donate Bitcoin to this address

Scan the QR code or copy the address below into your wallet to send some Bitcoin

Scan to Donate Ethereum to 0x65278F4b39184BC97FAf225209C786C4A0B451ed

Donate Ethereum to this address

Scan the QR code or copy the address below into your wallet to send some Ethereum

Scan to Donate Tether to 0x5e2aCAa3B527b9adc11Dc2c6759D2938a6fBf17D

Donate Tether to this address

Scan the QR code or copy the address below into your wallet to send some Tether