Tax-deductible interest is a borrowing expense that a taxpayer can claim on a federal or state tax return to reduce their taxable income. Several types of interest are tax-deductible, including mortgage interest on a primary or second home, student loan interest, and interest on some business loans.
Key Takeaways
- Interest is the amount of money you pay a lender to borrow money.
- The IRS allows taxpayers to deduct several interest expenses, including home mortgage interest and student loan interest.
- You can itemize investment interest and qualified mortgage interest (including points if you’re the buyer) on Schedule A of Form 1040 or 1040-SR.
- The student loan interest deduction is an adjustment to income on your tax return, so you don’t need to itemize to take it.
- Some interest is not tax deductible, such as that you pay on personal car loans and credit card balances.
Understanding Tax-Deductible Interest
Interest is the amount of money you pay a lender for the privilege of borrowing money or delaying the repayment of a debt. All loans incur interest, which the lender may roll into your monthly payment. For example, you pay back a portion of the principal (the amount you borrowed) plus interest every month with most mortgages. On the other hand, revolving loans—like credit cards—accrue interest only on unpaid balances.
To make certain loans more affordable, the IRS allows you to deduct several types of interest expenses, including:
- Investment interest
- Qualified mortgage interest (including points if you’re the buyer)
- Student loan interest
- Nonfarm business interest
- Farm business interest
- Interest related to income-producing activities
Not all types of interest are deductible. Specifically, the IRS does not allow you to deduct personal interest such as:
- The interest you pay on a loan to buy a car for personal use
- Credit card and installment loan interest on personal expenses
- Mortgage points (for sellers), service charges, credit investigation fees, and interest associated with tax-exempt income
Student Loan Interest Tax Deduction
While you can’t deduct your student loans, you can get a tax break on the interest you pay by claiming the student loan interest deduction.
Generally, you can deduct the smaller of $2,500 or the interest you actually paid during the year. However, the deduction may be gradually reduced (phased out) and eventually eliminated depending on your filing status and Modified Adjusted Gross Income (MAGI):
| Filing Status | Phaseout Begins | Deduction Eliminated |
|---|---|---|
| Single | $75,000 | $90,000 |
| Head of household | $75,000 | $90,000 |
| Qualifying widow(er) | $75,000 | $90,000 |
| Married filing jointly | $155,000 | $185,000 |
For tax year 2024, the updated limits are:
| Filing Status | Phaseout Begins | Deduction Eliminated |
|---|---|---|
| Single | $80,000 | $95,000 |
| Head of household | $80,000 | $95,000 |
| Qualifying widow(er) | $80,000 | $95,000 |
| Married filing jointly | $165,000 | $195,000 |
To claim the deduction, you must meet all of the following conditions:
- You paid interest on a qualified student loan during the tax year.
- You’re legally obligated to pay interest on a qualified student loan.
- Your filing status is not: married filing separately.
- Your MAGI is less than the annual limit.
- Nobody else can claim you or your spouse (if you file jointly) as a dependent on their tax return.
A qualified student loan is a loan you took out to pay qualified higher education expenses for you, your spouse, or your dependent. The loan can’t be from a related person or made under a qualified employer plan. Additionally, the loan must pay for qualified educational expenses for you, your spouse, or your dependent during an academic period in which the student is enrolled at least part-time in a degree program. Quarters, trimesters, semesters, and summer school sessions all qualify as academic periods.
Qualified expenses include:
- Tuition and fees
- Room and board included in the cost of attendance
- Books, supplies, and equipment
- Other necessary expenses (e.g., transportation)
If you paid at least $600 in student loan interest, you should receive Form 1098-E from your student loan servicer.
The student loan interest deduction is taken as an income adjustment, so you don’t need to itemize your deductions. Instead, you can enter the allowable amount directly on Form 1040 or 1040-SR.
Mortgage Interest Tax Deduction
You can deduct the mortgage interest you pay on the first $750,000 ($375,000 if married filing separately) of mortgage debt. If you bought the home before Dec. 16, 2017, a higher $1 million ($500,000 if married filing separately) limit applies. The loan must be secured by your main home or a second home.
According to the IRS, your main home is where you live most of the time, whether that’s a house, co-operative apartment, condominium, mobile home, house trailer, or houseboat. A second home can include any other residence you own and treat as a second home, even if you don’t use it during the year. However, if you rent out the property, you must use it for 14 days or at least 10% of the number of days you rent it—whichever is greater—for the interest to count as qualified residence interest. All homes must have sleeping, cooking, and toilet facilities.
You can deduct home equity loan interest, but only if you use the funds to buy, build, or substantially improve the home that secures the loan.
Your lender will send you Form 1098 to report qualified mortgage interest and points. To claim the tax break, you must itemize your deductions on Schedule A of your Form 1040 or 1040-SR form.
You can also deduct the mortgage interest you pay on a rental property, but you report it on Schedule E since it counts as a business expense.
Watch for Changes in What’s Deductible
Interest deductions are subject to limitations and exclusions, which can change from year to year. For example, taxpayers used to be able to claim the mortgage interest deduction on the first $1 million of mortgage debt. For loans originating after Dec. 15, 2017, the allowable debt amount is $750,000, due to the Tax Cuts and Jobs Act.
Be sure that you understand the rules and confirm your eligibility before claiming any deductions. When in doubt, consult with a qualified tax professional.
What Is the Difference Between a Tax Credit and a Tax Deduction?
Tax credits and tax deductions reduce the amount of tax you owe, but they work differently. Tax credits reduce your tax bill, while tax deductions reduce your taxable income.
Say you’re eligible for a $1,000 tax credit and a $1,000 tax deduction. The tax credit lowers your tax bill by $1,000, while the tax deduction reduces your taxable income—the amount of income on which you owe taxes—by $1,000. Of the two, tax credits save you more money.
What Interest Is Tax-Deductible?
You can deduct several types of interest, including mortgage interest, student loan interest, investment interest, and business loan interest. You must meet specific requirements to qualify for each deduction.
For example, you can deduct up to $2,500 of student loan interest, but only if your income is below $75,000 ($155,000 if you’re married filing jointly) for the tax year 2023, and $80,000 and $165,000, respectively, for 2024.
What Is the Standard Deduction for Tax Year 2023?
For tax year 2023, the standard deduction is $13,850 for single and married filing separately taxpayers, $20,800 for heads of household, and $27,700 for married filing jointly filers and surviving spouses. For tax year 2024, those figures are $14,600, $21,900, and $29,200.
The Bottom Line
Tax-deductible interest allows you to reduce your taxes by claiming allowable borrowing expenses. Student loan interest is taken as an income adjustment, so you don’t need to itemize your taxes to benefit from this tax break.
However, deducting investment interest and mortgage interest requires itemizing your taxes on Schedule A. Given the size of the standard deduction, it may not be worth your while to itemize and deduct these costs. Do the math each year to determine which approach is best for you financially.
Related Terms: Tax Credit, Tax Deduction, Interest Expense, Schedule A, Modified Adjusted Gross Income (MAGI).
References
- Internal Revenue Service. “Topic No. 505, Interest Expense”.
- Internal Revenue Service. “Rev. Proc. 2023-34”, Page 16.
- Internal Revenue Service. “Rev. Proc. 2022-38”, Page 18.
- Internal Revenue Service. “Topic No. 456, Student Loan Interest Deduction”.
- Internal Revenue Service. “Publication 970, Tax Benefits for Education”, Pages 31-36.
- Internal Revenue Service. “Topic No. 505, Interest Expense”.
- Internal Revenue Service. “Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2”.
- Internal Revenue Service. “Publication 936, Home Mortgage Interest Deduction”, Pages 2-4, 8, 14.
- Internal Revenue Service. “Publication 5307, Tax Reform Basics for Individuals & Families”, Pages 4-5.
- Internal Revenue Service. “Credits and Deductions”.
- Internal Revenue Service. “Rev. Proc. 2023-34”, Page 16.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2024”.
