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The Tax Implications of Paying Interest

 

The Tax Implications of Paying Interest

Roxanna Guinan
by Roxanna Guinan, Contributor

Add up the interest you’re shelling out each month, and by years’ end you might be shocked at how big a bite it takes out of your income.  Therefore, you will want to make sure that you take advantage of every penny of deductible interest at tax time.

The “What Are the Tax Implications of Paying Interest?” Tax Calculator may just be the ticket to claim what you are due.

First, to use this tax calculator you will need to enter your marginal tax bracket (based on your filing status) ? a helpful drop-down chart is provided on the tax calculator.  Then, move down to the “Home Mortgage Interest” category and enter any interest you paid to your mortgage company for your first or second mortgage, including construction loans (if applicable) and interest paid on a home equity loan. Note that to qualify for the home mortgage interest tax deduction, you can only deduct interest that was paid on your main home and/or second home.

Next is the “Investment Interest” section of the tax calculator.  Investment interest includes the margin interest paid to a brokerage firm to purchase securities, or other interest payments on investments that you own to generate income.   Enter any interest and dividend income you received from investments (or money market/cash holdings) into the appropriate field on the tax calculator. Also enter your short-term capital gains or losses.  You can find this information on your account statement, or on FORM 1099 DIV or INT from your brokerage firm or bank.  The tax calculator will offset your investment interest income against your investment interest paid.

The fourth section of the tax calculator is titled “Business Debt Interest.” If you incurred any business debt during the year, be sure to enter the amount you paid in interest on the debt as a deductible item on the tax calculator.

Finally, the last part of the tax calculator is “Personal Debt Interest,” which is typically not deductible. This category usually includes interest paid on a car loan for personal use, credit card and installment loan interest, service charges, credit investigation fees, and interest relating to tax–exempt income (such as interest to purchase or carry tax–exempt securities).

The “Tax Implications of Paying Interest” tax calculator is a useful tool that can help you determine how much overall interest you are paying each year, and may enable you to better manage your finances.