Interest on Individual Tax Returns

In the tax business, we see a lot of people trying to deduct for those expenses. Those are not actually considered deductible by the IRS. One of the most common expenses that people struggle with is interest. There are many types of interest, and many people have a hard time figuring it out. Which interest is deductible and which interest is not. This article is going to make that clear. There are only three types of interest that you can take as a deduction on your personal Individual tax return.

The first type of deductible interest is the interest you pay on your mortgage for your first and second homes. This amount should be sent to you by the bank on Form 1098 every year. This interest is reported as an itemized deduction on Schedule A. One thing you might not know is that RVs and house boats can be considered a second home and thus the interest on them is deductible on Schedule A as well. Thus the interest on them is also deductible on Schedule A. However, it is important to note Because you won't receive a 1098 form detailing the interest paid on the RV or houseboat, you'll need to communicate with your bank to find out how much interest you paid on the loan each year.

Another way you can deduct interest is when you purchase something on credit or with a loan as an employee business expense. It is also deducted as an itemized deduction on Schedule A. However, employee business expenses are limited to 2% of your income. Here's an example of being able to deduct interest as an employee business expense. Let's say you bought a laptop on credit because your employer must have one for you to work from home and go on business trips. In this case, the computer purchase price and interest are deductible as employee business expenses.

The third way you can deduct interest is if you are charged interest on the investment or if you borrow money to invest. If so, you will receive a statement from the investment company, or will be notified on your year-end statement from the brokerage company. You would report this type of interest expense as an itemized deduction on Schedule A.

There are some sources of interest that you may think are tax deductible on your personal return but they are not. This type of interest includes car loans, personal credit cards, in store credit, etc. Trying to deduct these things will create big bright red flags for the IRS to audit you.

If you are a business owner, you should know that the interest for individuals is very different than for businesses. You can learn more about the business interest deduction as well as the personal interest deduction on our website.