What Is Tax-Deductible Interest?

What Is Tax-Deductible Interest?

Let me explain tax-deductible interest directly: it's a borrowing expense you can claim on your federal or state tax return to cut down your taxable income.

You'll find several types qualify, like mortgage interest on your main or second home, student loan interest, and interest from certain business loans, including those on business credit cards.

Key Takeaways

Interest is simply the cost you pay to a lender for borrowing money. The IRS lets you deduct various interest expenses, such as home mortgage and student loan interest. You itemize investment and qualified mortgage interest, including points if you're the buyer, on Schedule A of Form 1040 or 1040-SR.

For student loan interest, it's an adjustment to income, so no itemizing is needed. Remember, some interest isn't deductible, like on personal car loans or credit card balances.

Understanding Tax-Deductible Interest

Interest is what you pay for borrowing money or delaying debt repayment. Lenders often include it in your monthly payments—for instance, mortgages repay principal plus interest each month, while credit cards add interest only on unpaid balances.

The IRS permits deductions for types like investment interest, qualified mortgage interest including buyer points, student loan interest, farm and non-farm business interest, and interest from income-producing activities.

But not everything qualifies; you can't deduct personal interest, such as on car loans for personal use, credit card interest for personal expenses, seller mortgage points, service charges, credit fees, or interest tied to tax-exempt income.

Student Loan Interest Tax Deduction

You can't deduct student loans themselves, but you can claim a deduction for the interest paid. Generally, deduct the lesser of $2,500 or what you actually paid that year, though it phases out based on your filing status and modified adjusted gross income (MAGI).

For 2024, phaseouts start at $80,000 for single, head of household, or qualifying widow(er), eliminating at $90,000; for married filing jointly, it starts at $160,000 and ends at $180,000. Married filing separately gets no deduction.

More on Qualified Student Loans

A qualified student loan covers higher education expenses for you, your spouse, or dependent, not from a relative or employer plan. It must fund expenses during an academic period with at least half-time enrollment in a degree program, including quarters, semesters, or summer sessions.

Qualified expenses cover tuition, fees, room and board, books, supplies, equipment, and necessities like transportation. If you paid $600 or more in interest, expect Form 1098-E from your servicer. Claim this as an income adjustment on Form 1040 or 1040-SR without itemizing.

Mortgage Interest Tax Deduction

You can deduct interest on the first $750,000 of mortgage debt ($375,000 if married filing separately). For homes bought before December 16, 2017, it's up to $1 million ($500,000 if separate). The loan must secure your main or second home.

Your main home is where you live most, like a house, condo, or houseboat. A second home is any other owned residence you treat as such, even unused, but if rented, you must use it personally for 14 days or 10% of rental days, whichever is more, for interest to qualify. All must have sleeping, cooking, and toilet facilities.

Deduct home equity loan interest only if used to buy, build, or improve the securing home. Your lender sends Form 1098 for reporting. Itemize on Schedule A of 1040 or 1040-SR. For rental properties, deduct on Schedule E as a business expense.

Watch for Changes in What’s Deductible

Deductions have limits that can shift yearly. For example, pre-2017 mortgages allowed $1 million, but post-December 15, 2017, it's $750,000 due to the Tax Cuts and Jobs Act. Understand the rules, confirm eligibility, and consult a tax pro if unsure.

What Is the Difference Between a Tax Credit and a Tax Deduction?

Both reduce taxes, but credits cut your bill directly, while deductions lower taxable income. A $1,000 credit saves $1,000 on taxes; a $1,000 deduction reduces income taxed, saving less depending on your rate. Credits are more valuable.

What Interest Is Tax-Deductible?

Deductible types include mortgage, student loan, investment, and business loan interest, with specific rules. For student loans, up to $2,500 if income under $90,000 single or $180,000 joint for 2024.

What Is the Standard Deduction for Tax Year 2023?

For 2024, it's $14,600 single/separate, $21,900 head of household, $29,200 joint/surviving spouse. For 2025, $15,000, $22,500, and $30,000 respectively.

The Bottom Line

Tax-deductible interest lets you lower taxes via borrowing expenses. Student loan interest adjusts income without itemizing. But for investment or mortgage interest, you must itemize on Schedule A. With the standard deduction's size, calculate yearly to see if itemizing pays off.