Tax-Deductible Interest
Candlefocus EditorQualified mortgage interest, also referred to as home loan interest, is interest paid on a loan secured by your home or a second home you own. Interest on loans for a primary residence and/or a second home are deductible for taxpayers who itemize their deductions. Qualified mortgage interest includes interest payments on loans for house purchase, as well as any mortgage refinancing, home equity loan, or a home equity line of credit. To take the deduction, the taxpayer must meet the IRS’s definition of qualified residence interest. Certain types of home loan interest payments are not deductible, such as the interest payments on a loan used to purchase a rental property or a loan used to purchase a vacation home.
Deductible student loan interest is any interest you pay during the tax year on a qualified student loan. A qualified student loan generally is any loan you took out exclusively to pay qualified higher education expenses at an eligible institution. The full amount of student loan interest you paid during the year is deductible with a limit of $2,500 per return. The deduction can be taken without itemizing and is claimed on Form 1040 with the student loan interest deduction line.
Taxpayers can also itemize investment interest expense deductions on Schedule A of Form 1040, or 1040-SR. Investment interest includes interest on margin loans used to finance investments in stocks, bonds, and mutual funds. Taxpayers can only deduct investment interest expense up to the amount of net investment income reported on Form 1040 or 1040-SR. Net investment income includes any taxable income you received from investments such as stocks, bonds and mutual funds, but does not include nontaxable income such as municipal bond interest. Any investment interest expense in excess of net investment income cannot be deducted.
Tax-deductible interests can help reduce a taxpayer’s total tax bill, and can potentially lead to a larger tax refund. This benefit is only available to taxpayers who itemize on their federal taxes, and to taxpayers who do not itemize their deductions, a deduction of up to $2,500 per return is available for student loan interest. Understanding which types of interest payments are tax-deductible can help taxpayers to make the most of their deductions and get the largest refund possible.