How to Make Your Mortgage Work for You with Interest Expense Deductions
- February 20th, 2015
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Nobody likes interest. It’s existed for thousands of years and some of the most powerful figures in our history have had to take out a loan… even a Pope (see Pope Sixtus IV). This may just be conjecture, but we’re guessing they did not particularly enjoy paying those loans back with interest. Pope Sixtus IV even tried to supplant his bankers (the famed Medici’s of Florence) in an attempt to restore the Vatican’s financial prowess. Unfortunately, the tactics of the Italian Renaissance are no longer applicable today, but we have developed a much more civilized approach to reducing the pain caused by interest. There are even ways for you to turn that interest into a deduction this tax season. Here’s everything you need to know about interest expense.
Understanding Interest Expense
Interest expense is defined as the cost of funds loaned to a business by a lender within an accounting period. Your interest is then expressed as a percentage of the principal that you must pay off. In layman’s terms, you borrow a specified number from the bank, and then you agree to pay that number back over a specified time period (plus the agreed upon interest rate).
Traditionally, people have hated that additional interest, but there are ways to claim that interest as a deduction or as a credit. That means you can turn your small business loans, student loans, automotive loans (for business) and mortgage into a way to save money this tax season. However, you will not be able to collect interest expense deductions on the following:
- A personal auto loan
- Personal credit card interest
- Credit investigation fees
The IRS has a variety of tax-forms that you will need to examine in order to clearly make your deduction. Those forms can be found on this IRS page. We recommend that you check it out before you settle on any of the aforementioned deductions.
Interest expense is a simple and oft-overlooked method of claiming a tax deduction that could save you thousands of dollars this tax season (especially if you have a mortgage). In addition to interest expense, you will have to decide whether you want to make a standardized deduction or itemize on taxes (check out our last blog post for more information). If you have any further questions about tax services or interest expense please feel free to give us a call at 516.794.5752.