It turns out that not all loan programs are the same when it comes times to look at your tax situation. Were you aware that when you borrow money you could also be shrinking the amount of federal taxes you have to pay to the government? Many loans can give you a tax credit which lowers the yearly tax you owe and other types of loans can give you a tax deduction which reduces your gross taxable income. Just about everyone wants to borrow money from time to time and its smart to do your research before jumping into a big loan commitment. Heres a simple guide to what loans may qualify you for a tax deduction, though obviously individual cases will vary.
Student Loans: Did you know that many loans you take out for school could give you a tax advantage? You can, in many cases, deduct the interest you paid on the loan from your federal taxes. Not all school loans are eligible for this, but its a good way to reduce the taxes you pay, especially if youre a cash-strapped student with a limited income. The interest you pay on most education loans can only be deducted if you make under a certain amount of money, based on your individual filing status.
House Mortgages: For most people their home is the largest purchase they ever make, and paying a home loan can actually be a good way to reduce the amount of money you owe on your income taxes each year. Most house loans are designed so that you can deduct the amount of interest you pay on the loan every year. Out of all the loans that have tax benefits associated with them, house mortgages are probably the most well-known. Since most home mortgages are set up to be paid over 30 years, that means that purchasing a house can give you 30 years of potential tax benefits.
Home Equity Loans (HELOC): A home equity loan used to improve your home could eventually raise the value of your house and give you even more equity in the long run. If your home is more valuable now than when you bought it then you might be able to take out a home equity loan and deduct the interest you pay on that borrowed money. There are some restrictions about how much of your loans interest actually qualifies for a tax deduction. You can use a home equity loan for a number of things, you may be able to get additional tax deductions by using the money for home improvements. For some homeowners some of the cost of a HELOC can be minimized with home remodeling tax deductions.
There are, of course, a lot of differences between these loans. Not everyone will be eligible for all the different tax credits that these loans may offer. Sometimes your income, the amount of money you want to borrow and the reason of the loan will limit the amount of money you can deduct from your taxes in any given year. Before you take out any of these loans you may want to speak with your tax professional to make sure the tax benefits pertain to your individual situation. Sometimes applying for the right kind of loan can definitely save you thousands of dollars on your income taxes, so its worth investing a little bit of time to look into what sort of tax deductions you are eligible for.
