Tax Deductions

Gregory J. Cook, EA, CPA+
Accredited Tax Advisor
Past President Alabama Society of Enrolled Agents
Past President Alabama Association of Accountants

Interest Expense

Interest is an amount you pay for the use of borrowed money. To deduct interest you paid on a debt you must be legally liable for the debt. Additionally, you generally must itemize your deductions, unless the interest is on rental or business property or on a student loan.

If you prepay interest, you must allocate the interest over the tax years to which it applies. You may deduct in each year only the interest that applies to that year. However, there is an exception that applies to points paid on a principal residence.

The types of interest you can deduct as itemized deductions on Form 1040, Schedule A (PDF) are investment interest and home mortgage interest, including certain points.

You can deduct student loan interest on Form 1040 or Form 1040A.

Home mortgage interest is interest you pay on a loan secured by your main home or a second home. The loan may be a mortgage to buy your home, a second mortgage, a home equity loan, or a line of credit.

Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking and toilet facilities.

A second home can include any other residence you own, and 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 home mortgage interest.

Home mortgage interest and points are generally reported to you on Form 1098 (PDF), Mortgage Interest Statement, by the financial institution to which you made the payments.

If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on these mortgages:

A mortgage you took out on or before October 13, 1987 (grandfathered debt.)
Mortgages taken out after October 13, 1987, to buy, build, or improve your home, (called home acquisition debt) but only if this debt plus any grandfathered debt totals $1 million or less throughout 2007. The limit is $500,000 if you are married filing separately.
Any mortgages taken out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if these mortgages total $100,000 or less throughout 2007, and all mortgages, including any grandfathered debt and home acquisition debt, on the home, total no more than your homes fair market value. The limit is $50,000 if you are married filing separately.

If one or more of your mortgages does not fit into any of these categories, refer to Publication 936, Home Mortgage Interest Deduction, to figure the amount of interest you can deduct.

You may be able to take a credit against your federal income tax if you were issued a mortgage credit certificate by a state or local government for low income housing. Use Form 8396 (PDF), Mortgage Interest Credit, to figure the amount. For further information, please refer to Publication 530, Tax Information for First Time Homeowners.

You cannot deduct personal interest. Personal interest includes interest paid on a loan to purchase a car for personal use, credit card and installment interest incurred for personal expenses. Items you cannot deduct as interest include 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.

News and Articles from Bara Business Center

Greg Cook

Greg Cook on the Recovery Act ...

The Recovery Act was passed by Congress and signed into law by President Obama on February 17, 2009. The purpose of the $787 billion Recovery package is to jump-start the economy to create and save jobs. The Act specifies appropriations for a wide range of federal programs, and increases or extends certain benefits under Medicaid, unemployment compensation, and nutrition assistance programs. The legislation also reduces individual and corporate income tax collections (to an extent), and makes a variety of other changes to tax laws.

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This Act will have far reaching consequences and we will be dealing with it for years to come (at least until 2018). Twenty-eight different agencies – such as the Departments of Education; Health and Human Services; and Energy – have been allocated a portion of the $787 billion in Recovery funds. Each agency develops specific plans for how it will spend its Recovery Act funds. The agencies then award grants and contracts to state governments or, in some cases, directly to schools, hospitals, contractors, or other organizations. The agencies are required to file weekly financial reports on how they are spending the money and their specific activities related to Recovery funds.

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Keeping Good Tax Records

You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.

Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:

Bills, Credit card and other receipts, Invoices, Mileage logs, Canceled, imaged or substitute checks or any other proof of payment, and ...

Any other records to support deductions or credits you claim on your return.

Good recordkeeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.