Can I Deduct Interest Paid on a Bank Loan on My Federal Taxes?
Consumerism in the United States is the backbone of the economy. Debt and credit accounts are used for individual purchases, business start-ups and massive capital infusions. As a result, America is one of the most indebted societies in the world. However, there can be relief from some of this debt. The IRS allows for some of the interest you pay on bank loans to be deducted on your federal taxes each year. It is important to understand what is deductible.
The most common, and advantageous, bank loan tax deduction is the mortgage interest deduction. This deduction is available to all homeowners who are currently paying on a home mortgage, a home equity loan or a home equity line of credit. This can be a significant deduction as the interest paid on these loans, particularly the ones that were recently opened, is often substantial. This can in turn reduce your total tax liability.
Unsecured Bank Loans
Unsecured bank loans, like credit cards and small lines of credit, cannot be used on your federal taxes as interest deductions. The government significantly rewards homeowners -- and not renters -- for their bank loans. However, if you use your non-owned home for any kind of business, you might be able to deduct the rent you pay toward that home. In other words, if you are using an unsecured bank loan to support your housing or your small business, you might be able to get tax relief.
Many student loans are financed by private banks. This not only applies to private loans, but to some federally insured loans as well. The federal government allows you to deduct up to $2,500 in student loan interest that you paid over the course of a year on your student loans. This can be particularly useful if you are burdened by massive student loans from college or graduate school. Of course, it is best to speak with a tax adviser prior to writing off these interest payments.
The IRS also allows homeowners to deduct mortgage points and fees on their federal returns each year. This means that, in addition to mortgage interest, homeowners might be able to further reduce their tax liability by writing off origination and discount points. This deduction does not apply to fees like appraisal cost, attorney fees or title insurance. In addition, it only applies to the cost of the loan for one year. Therefore, if you financed your origination fees, you can only write off the amount you paid in the tax year.
Based in Eugene, Ore., Duncan Jenkins has been writing finance-related articles since 2008. His specialties include personal finance advice, mortgage/equity loans and credit management. Jenkins obtained his bachelor's degree in English from Clark University.