Almost everyone at some point in their lives has taken a loan. The reason for taking a loan can be anything from financing a wedding, remodeling a home, buying a house, or car, or even paying off an old loan (debt refinancing). However, regardless of the reason for the loan, one thing is sure, it will surely come with interest.
This is the money you need to pay on top of the initial money borrowed and it is often added to your monthly payment. It is through this that the lender makes their profit. The rates often range from 10 to 28 percent of the amount borrowed.
Typically, this charge isn’t tax deductible, but there are certain cases where this is not the case. In this article, we will be looking at the cases where you can get a debt interest deduction. First, let’s explain what this financial term means.
Meaning of Debt Interest Deduction
To understand what this term is, you need to know what tax deduction is. Tax deduction refers to the amount a taxpayer can deduct from their taxable income in order to reduce the value of their tax. Not every income is taxable, similarly not every expense is eligible for deduction.
Typically, the interest on a loan you take should not be deductible. However, there are certain cases where it can be. This is known as a debt interest deduction. A simple definition of this phrase is the process of deducting an amount from your loan interest to reduce the overall value of your tax.
Cases When You Can Get a Debt Interest Deduction
As earlier mentioned, interest on loans is typically not deductible. However, if the funds you borrow are used for certain expenses, then you can get a deduction. Below, we will look at some of the expenses that you can get this deduction on.
Business Expenses
Running a business often requires financing. It does not matter the size or type of business, as long as you run a business, you will occasionally have to fund it to keep it running. Sometimes, you may even have to borrow money from a financial institution to finance certain aspects of your business.
The interest you incur on the loan you take for your business expenses can be deductible. You do not need to have a big business. Even if your business is small, you can still get a deduction on some business expenses.
Some business expenses that may be deductible include advertising, supplies, office rent, machinery, equipment, vehicle purchase, and transportation. The money that is deducted from these expenses will be subtracted from your business income tax return, so you will end up paying less on your taxes. Note that if the funds from the loan are used for both business and personal expenses, it is only the business expenses that will be written off.
Taxable Investments
If you use the money you borrow to make certain investments, the interest on them can also be tax deductible. Some investments that are eligible for this include mutual funds, bonds, and stocks. However, if the investment provides tax advantages, for example, a tax-exempt bond, you won’t be able to take a deduction for it. Also, to get this type of return, the deductions have to be itemized on your tax return.
Educational Expenses
If the money you get from a loan goes fully to fund higher education expenses, then the loan may be considered a student loan. Expenses like transportation, supplies, equipment, textbooks, room/board, fees, and tuition may be considered tax-deductible in this case. However, for this to work, the student must be a taxpayer or the dependent or spouse of the taxpayer.
Note that it might be better to just get a student loan in this case. This is because the interest attached to student loans is lower than that of personal loans. Also, some lenders often ask to know what the funds they give out will be used for. Some lenders may not agree to you using the borrowed money to finance educational expenses.
Mortgage Interest Deductions
When talking about this topic, one of the common things people want to know is whether their mortgage is tax-deductible or not. Well, the simple answer to this is yes. You can reduce the amount you pay as tax by how much you pay on your mortgage interest during the year.
To be clear, this does not mean your entire mortgage in a year is tax deductible. No, it simply means that the interest you pay on the mortgage every month is. Deductions do not apply to your mortgage principal; in the same way it does not apply to your down payment or insurance premiums.
Examples of Mortgage Interest
As you’ve seen, not every fee you pay for your mortgage is deductible. Apart from the interest on the mortgage, some other fees can also apply as deductibles. For example, if you pay your monthly payment late, it will likely attract a late payment fee. You can deduct this extra fee from your income.
Another fee that you can deduct is the prepayment fee. This is an amount that some lenders charge borrowers who want to completely pay back their loans before it expires. You can also deduct on points you pay to reduce your mortgage interest rate.
If you have a second home that you do not rent out, you can also deduct from this. If you rent it out for some time within the year, it can still qualify. Mostly what you have to do is make sure you use the property yourself for about 10% of the entire time you rent it out. You can also do your research about deductions for rental properties to learn more about this.
How to Get Your Debt Tax Deduction
Typically, deductions are automatically on tax returns. This means that whatever deduction you’re eligible for should be on this document when you get it. However, mistakes can be made sometimes. so it is best to always look through it to ensure it’s correct.
If it isn’t correct and some costs are missing, you would need to correct it yourself. Sometimes, you may find that the particular expense you are looking out for has even been accounted for, but other expenses may be missing. This is why you need to carefully take your time and read through it.
Another reason you need to carefully go through the return is if you have abroad loan expenses. That’s to say if you have used any of the borrowed funds for an abroad purchase. In this case, this expense will not be listed automatically. Therefore, you would have to list them manually in order to get your deduction.
There are so many things you need to know about debt deduction to make sure you get it. Visit besterefinansiering.no/skattefradrag-og-refinansiering/ to find out about important things you need to know about debt deduction. However, one of the most important things is to properly check your tax return once you get it.
Conclusion
Getting a return on your loan interest is possible when you use the money for certain purchases. It is also possible to get it on your home mortgage. What is important, however, is that you make sure these deductions are included in the return you receive. If they aren’t, make sure you make the necessary corrections to get what you are eligible for.