Just about everybody needs to borrow money from time to time and it makes sense to do your homework before diving into a big loan commitment. Were you aware that when you take out a loan you could actually be reducing the amount of income taxes you have to pay to the government? It turns out that not all loan programs are the same when it comes times to pay your taxes. Some loans may give you a tax credit which shrinks the yearly tax you owe and other kinds of loans can give you a tax deduction which lowers your gross taxable income. Here’s a brief guide to which loans may qualify you for a tax credit, though obviously everyone’s tax situation will vary.

School Loans: You can, in many cases, deduct the interest you paid on the loan from your federal taxes. Not all school loans are eligible for this, but it’s a good way to decrease the taxes you pay, especially if you’re a cash-strapped student with a limited income. The interest you pay on some education|school|student loans can only be deducted if you make under a certain amount of money, based on your individual filing status.

House Mortgages: For many taxpayers their home is the largest purchase they ever make, and paying a home loan can actually be a good way to reduce the amount of money you owe on your federal taxes each year. Most home payment plans are set up so that you can deduct the amount of interest you pay on the loan every year. Out of all the loans that have tax deductions associated with them, home mortgages are probably the most talked about. Since most house loans are designed to be paid over 30 years, that means that buying a home can give you 30 years of potential tax deductions.

Home Equity Loans (HELOC): A home equity loan used to improve your dwelling could eventually increase the value of your home and give you even more equity over time. If your dwelling is more valuable now than when you bought it then you might be able to take out a home equity loan and deduct the interest you pay on that borrowed money. There are some restrictions about how much of your loan’s interest actually qualifies for a tax deduction. You can use a home equity loan for a number of things, you may be able to get additional tax credits by using the money for home repairs.

There are, of course, a lot of variables between these loans. Not everyone will be eligible for all the different tax benefits that these loans may offer. Sometimes your income, the amount of money you want to borrow and the reason of the loan will limit the amount of money you can deduct from your taxes in any given year. Before you apply for any of these loans you may want to talk with your tax professional to make sure the tax benefits apply to your individual situation. Sometimes applying for the right kind of loan can definitely save you thousands of dollars on your income taxes, so it’s worth investing a little bit of time and energy to look into what sort of tax deductions you are eligible for.

This entry was posted on Thursday, August 6th, 2009 at 1:52 pm and is filed under Mortgage. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.