Smart Interest: What You Can (and Can't) Deduct on Your Taxes

Interest rates may fluctuate, but tax rules for deducting interest generally remain consistent—unless Congress steps in. Since the 2017 Tax Cuts and Jobs Act (TCJA), we’ve seen notable changes that impact how interest deductions work across different categories.

Here's a breakdown of how the IRS treats five types of interest:

1. Mortgage Interest: If you're itemizing, mortgage interest on acquisition debt (used to buy, build, or improve a home) is deductible up to $750,000—$1M if the loan predates December 16, 2017. Home equity loan interest is only deductible if used for significant home improvements.

2. Investment Interest: Deductible up to your annual net investment income, excluding most long-term capital gains and qualified dividends unless you forfeit preferential tax treatment. Consider this carefully with your advisor.

3. Business Interest: The TCJA caps deductible business interest at 30% of adjusted taxable income (ATI). Small businesses with under $29 million in average gross receipts over three years are generally exempt.

4. Student Loan Interest: Up to $2,500 in interest may be deducted annually if you're legally responsible for the loan and meet income requirements.

5. Personal Interest: Credit card and other personal expenses? Non-deductible. Keeping funds separate and tracked is essential for avoiding IRS scrutiny.

Final Thought: Interest expense deductions can be valuable—but they're also nuanced. Let Verity CPAs help you navigate the rules. 📧 info@verity.cpa | 📞 808.546.5026