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Be Tax Savvy! Allowable Tax Deductions for Interest

By Tanya Roth, Esq. on March 25, 2010 | Last updated on March 21, 2019

In discussing allowable tax deductions, many people want to know exactly when they can -- and can't -- deduct interest expenses.

Although you can deduct interest in many cases, there are times when interest expenses clearly do not fall within the allowable tax deductions. When allowable, however, interest expense deductions can be a great way of reducing your income tax amount. 

So, what are allowable interest deductions available to the individual taxpayer, under federal income tax law?

The general rule is this:

Non-personal interest that was paid or accrued in the tax year may be deductible.

  • Student Loan Interest may be deductible on qualified student loans if you paid the interest in the tax year and are not "married filing separately." Your modified AGI must be less than $70,000 and under $145,000 if filing jointly.
  • Home mortgage interest can be deductible, if it is interest on a loan that was used to acquire, construct or substantially improve a home that serves as a principal residence.  There are limits and restrictions on deducting home mortgage interest and we'll address them in a later post.
  • Investment interest is generally deductible but is limited to the net investment income of the taxpayer for the year. The good news on the limit is that you can carry the deduction forward, if you exceed your limit for the tax year.  

Under the federal income tax law, certain types of interest are not deductible. Generally, personal interest is not deductible. What constitutes "personal interest"?

  • Interest in personal credit cards
  • Car loan interest, if the car was not for business use
  • Interest on loans used for personal purposes, if the loan was not secured by a personal residence.

Keep in mind that this post only refers to deductions available to individuals. Interest may sometimes be deducted as a business expense, too, if it arises in connection with a trade or business. But there are separate and often complex rules that govern the federal income tax law relating to business expense deductions

Other posts in the Tax Savvy series:

  1. What Is Gross Income, Anyway?
  2. Do Gifts = Income?
  3. Deduct Daycare Expenses 
  4. The Education Tax Deductions 
  5. Medical Expense Deduction
  6. So, You Married a Tax Cheat?
  7. Bad Debts or Gifts?

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