In the tax business, we see a lot of people trying to take deductions for expenses that are not actually considered deductible by the IRS. One of the most common expenses that people struggle with is interest. There are many different types of interest, and many people have a difficult time figuring out what interest is deductible and what interest is not. This article is going to clear this up. There are only three types of interest that you can take as a deduction on your personal tax return.

The first type of deductible interest is the interest you pay on your mortgage for your first and second home. This amount should be sent to you every year by the bank on a form 1098. This interest is reported on the Schedule A as an itemized deduction. One thing that you might not know is that RVs and house boats can be considered a second home and thus the interest on them is deductible on the Schedule A as well. Although, it is important to note that you will not receive a 1098 form detailing the interest paid on an RV or house boat, so you will need to communicate with your bank to find out how much interest you paid on the loan each year.

The second way you can deduct interest occurs when you purchase something on credit or with a loan as an employee business expense. This is also deducted on the Schedule A as an itemized deduction. However, employee business expenses are limited to 2% of your income. Here is an example of being able to deduct interest as an employee business expense. Let’s say you purchased a laptop computer on credit because your employer requires you to have one to work from home and to take on business trips. In this case, the computer purchase price and the interest are deductible as an employee business expense.

The third way you can deduct interest is if you are charged interest on investments or if you borrow money to invest. If this is the case, you will receive a statement from the investment company, or it will be reported on your end of year statement from the brokerage company. You will report this type of interest expense as an itemized deduction on the Schedule A.

There are some sources of interest that you might think are tax deductible on your personal return but they are not. These types of interest include car loans, personal credit cards, in store credit, and so forth. Trying to deduct these things will create big bright red flags for the IRS to audit you.

If you own a business, you should know that interest for individuals is a lot different than for businesses. You can learn more about business interest deductions as well as personal interest deductions on our website