Were you aware that when you take out a loan you could actually be shrinking the amount of federal taxes you have to pay to the government? Surprisingly, not all loan programs are equal when it comes times to look at your tax situation. Just about everyone needs to borrow cash from time to time and it makes sense to do your research before diving into a big loan. Some loans can give you a tax credit which shrinks the tax you owe and other kinds of loans can give you a tax deduction which lowers your gross income. Here’s a brief guide to what loans may qualify you for a tax credit, though obviously everyone’s tax situation will be different.
School Loans: The interest you pay on many education|school|student loans can only be deducted if you make under a certain amount of money, based on your individual filing status. Did you know that many loans you take out for school could give you a tax advantage? You can, in some cases, deduct the interest you paid on the loan from your federal taxes. Not all student loans are eligible for this, but it’s a good way to decrease the taxes you pay, especially if you’re a struggling student with a limited income.
Home Mortgages: Out of all the loans that have tax benefits associated with them, home mortgages are probably the most well-known. Most house mortgages are set up so that you can deduct the amount of interest you pay on the loan every year. Since most house loans are designed to be paid over thirty years, that means that buying a house can give you 30 years of potential tax deductions. For most taxpayers their home is the biggest purchase they ever make, and paying a mortgage can actually be a good way to reduce the amount of cash you owe on your income taxes each year.
Home Equity Loans (HELOC): A home equity loan used to improve your house could eventually increase the value of your house and give you even more equity over time. If your dwelling 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 loan’s interest actually qualifies for a tax deduction. You can use a home equity loan for a variety of things, you may be able to get additional tax deductions by using the money for house upgrades.
There are, of course, a lot of variables between these loans. Everyone will not be eligible for all the different tax benefits that these loans may offer. Sometimes your income, the amount of money you want to borrow and the purpose of the loan will limit the amount of money you can deduct from your taxes in any given year. Before you apply for any of these loans you may want to talk with your tax professional to make sure the tax benefits apply to your individual situation. Sometimes applying for the right kind of loan can literally save you thousands of dollars on your income taxes, so it’s worth investing a little bit of time and energy to look into what sort of tax deductions you are eligible for.
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