Tax-Deductible Interest: What Qualifies and How to Claim It
Tax-deductible interest reduces your taxable income or is deducted directly from your income, depending on the type. The IRS allows deductions for several borrowing costs, but many personal-interest payments (for example, most credit card interest and personal car loans) are not deductible.
Common types that qualify
- Mortgage interest
- Deductible on loans secured by your main home or a second home.
- Limit: interest on acquisition debt up to $750,000 of mortgage principal for loans originated after December 15, 2017 ($375,000 if married filing separately). Higher limits ($1,000,000 / $500,000) apply to older loans originated before that date.
- Home equity loan interest is deductible only if the funds are used to buy, build, or substantially improve the home that secures the loan.
- Lender typically issues Form 1098. To claim, you must itemize deductions on Schedule A (Form 1040). Interest on rental property is reported on Schedule E.
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For a home used both personally and as a rental, special rules apply (minimum personal-use days required to qualify).
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Student loan interest
- An above-the-line deduction (adjustment to income), so you do not need to itemize.
- Generally you can deduct up to $2,500 of interest paid (or the amount actually paid, if smaller), subject to income phaseouts based on modified adjusted gross income (MAGI) and filing status. For recent tax years, phaseouts have applied (example thresholds have been $90,000 single / $180,000 married filing jointly for one year), but amounts can change by year.
- Requirements: interest paid on a qualified student loan for qualified higher-education expenses, you’re legally obligated to pay, filing status cannot be married filing separately, and you cannot be claimed as a dependent by someone else.
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Servicers issue Form 1098‑E if you paid $600 or more.
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Investment interest
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Interest on loans used to buy taxable investments can be deductible but generally must be itemized on Schedule A and is limited to your net investment income for the year.
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Business interest
- Interest on business loans, including interest on business credit cards, is normally deductible as a business expense and reported on the appropriate business tax schedule (e.g., Schedule C, Form 1120, Schedule F).
What is not deductible
- Interest on personal car loans (for personal use).
- Personal credit card and installment loan interest used for personal expenses.
- Certain fees and charges tied to tax-exempt income, and mortgage points paid by sellers (these are not deductible by the seller).
How to claim deductions
- Itemize on Schedule A (Form 1040) for mortgage interest and many investment-interest deductions.
- Report student loan interest as an “adjustment to income” directly on Form 1040 (no itemizing required).
- Report rental property interest on Schedule E.
- Report business interest on the business tax return or schedule applicable to your business entity.
Watch for changes
Tax law can change and limits or phaseout thresholds may be adjusted annually. Notably, the Tax Cuts and Jobs Act reduced the mortgage acquisition debt limit for newer loans. Confirm current limits and rules before claiming deductions or consult a tax professional.
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Credit vs. deduction — quick difference
- Tax credit: reduces your tax bill dollar-for-dollar.
- Tax deduction: reduces the amount of income subject to tax, which lowers your tax based on your marginal rate.
Bottom line
Some interest payments can lower your taxable income (mortgage, student loan, investment, and business interest), but each has specific rules, limits, and filing requirements. Student loan interest is especially valuable because it’s an above-the-line deduction. Because the standard deduction is often larger than the total of itemized deductions, run the numbers each year to see whether itemizing still benefits you. When in doubt, get current guidance from the IRS or a qualified tax advisor.