Among the itemized deductions on Schedule A of IRS Form 1040, you will find “Interest You Paid.” As you get your records together for tax preparation, you should realize that not all interest can be deducted on your return. Interest paid on credit cards and assets held for personal use generally isn’t deductible, for example.
Interest deductions on Schedule A fall into two (2) categories. You probably can deduct interest on debt related to your home, and you may be able to deduct interest incurred as part of investment activity.
If you have borrowed money to buy, build or improve your home, you can deduct some or all of the interest you paid in 2015. A “home” can be a house or an apartment – even a trailer or a boat, as long as it has cooking, sleeping and toilet facilities. You can deduct the interest on two such homes.
The deduction for interest paid on your mortgage is limited to the first $1 million of debt ($500,000 for married filing separately). However, the IRS has ruled that it will treat debt on the equity of your home (see Home Equity Interest section below) as home acquisition debt to the extent it exceeds $1 million, effectively increasing the overall limit to $1.1 million ($550,000 for married taxpayers filing separately).
Home Equity (HELOC) Interest
In addition to home acquisition debt, interest paid on home equity debt may also be deductible. Financial institutions often lend money to homeowners, using their ownership interest (i.e., equity) as collateral. This type of loan is commonly issued as a line-of-credit, and the acronym “HELOC” is an industry term that stands for Home Equity Line-Of-Credit.
Interest paid on loans secured by your home, but not necessarily used for any specific purpose, is deductible on balances up to $100,000 ($50,000 for married taxpayers filing separately).
Alternative Minimum Tax (AMT) Consideration
The alternative minimum tax (AMT) rules for deducting mortgage interest are more restrictive than the rules for regular income tax. If you expect to be subject to the AMT, I can assist you in determining whether the interest from your mortgage or HELOC is deductible when calculating your alternative minimum tax (AMT).
If you borrow money to make investments, the interest paid on the loan may be deductible on Schedule A. For example, interest paid on a margin account with a brokerage firm will be classified as investment interest. Also, if you borrow funds to buy a tract of land that you intend to later sell at a profit, the interest you pay can be investment interest.
On Schedule A, investment interest is deductible up to the amount of taxable investment income you report.