Are you itemizing your deductions, in your individual income tax return? Consider deducting interest expense. There are two types of interest deductible as itemized deductions. They are investment interest and qualified mortgage interest including the points. But remember investment interest is limited, to your net investment income and qualified mortgage interest is allowed, only if you are a buyer. When you prepay interest, you must allocate the interest over the tax years to which the interest applies. You may deduct in each year only the interest that applies to that year. However note that, an exception applies to mortgage points, paid on a principal residence. If you use part of the refinanced mortgage proceeds to improve your main home and you meet certain requirement; you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Consider watching our mortgage points video to know the requirements. Qualified mortgage interest is interest and points you pay on a loan secured by your main home or a second home. Your main home is where you live most of the time. A second home can include any other residence you own and choose to treat as a second home. You do not have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as qualified residence interest. Consider checking Can I Deduct My Mortgage Related Expenses? Interview on IRS website. Qualified mortgage interest and points are generally reported to you on Form 1098. Qualified mortgage interests are yield on home acquisition debt and home equity debt. A mortgage taken to buy, build, or improve your home is called home acquisition debt But it qualifies only if throughout the year the mortgages plus any grandfathered debt totaled $1 million or less. The limit is $500,000 if you are married filing separately. Home equity debt other than home acquisition debt taken can qualify up to a total of $100,000. The limit is $50,000 if you are married filing separately. However, Home equity debt other than home acquisition debt is further limited to your home's fair market value reduced by the grandfathered debt and home acquisition debt. You may be subject to a limit on some of your itemized deductions including mortgage interest. Consider reading instructions to Form 1040 for the limits. You may also be able to take a credit against your federal income tax for certain mortgage interest if a mortgage credit certificate was issued to you by a state or local government for low-income housing. Use Form 8396 (PDF), Mortgage Interest Credit, to figure the amount. There are certain types of interest not deductible They include personal interest, such as: Interest paid on a loan to purchase a car for personal use. Credit card and installment interest incurred for personal expenses. Points (if you are a seller), service charges, credit investigation fees, and interest relating to tax-exempt income, such as interest to purchase or carry tax-exempt securities. Also note that there are certain types of interest deductible elsewhere on the return. They are Student loan interest which is an adjustment to income, Non-farm business interest and Farm business interest which are deductible business expenses and Interest incurred to produce rents or royalties which may be limited.
