When it comes time to do your taxes, it is always beneficial to take as many tax deductions as you possibly can.  If you can legally make the deduction, it won’t be considered cheating on your taxes.  You just want to be sure that you are paying the least possible amount on your taxes.  Sometimes people miss deductions they have available and end up paying more taxes than they should.  That is never fun.

When figuring out your gross income, you have to include basically any money that comes in to you.  This includes your ordinary wages, extra income, interest, dividends, etc.  The only money coming in to you that is not included is cash that you get in the form of a loan.  If someone lends you ten thousand dollars, you don’t report that as income.  If someone owes you ten grand and pays you back in full without interest, you don’t have to include any of that income in your taxes.  However, if you have ten grand in your savings account and you accrue five hundred bucks worth of interest in the year, you do have to include that in your taxes.

Now what sort of interest payments can you deduct and use to offset your total tax bill?  Well the only sort of of interest a regular working individual may deduct is the interest on their home loan.  Your mortgage interest is deductible up to a million dollars worth of principle.  So for example, say that your mortgage is 500k and you end up paying 30k worth of interest in a given year.  You may deduct that 30k against your income.  However, if your mortgage balance is 2 Million and you end up paying 120k worth of interest that year, only half of it is deductible.  Also, it is only the interest portion of your payments that are deductible.  You are typically paying back some of the principle with each payment, and that part is not deductible.

So what other types of interest are deductible for an individual?  Well, pretty much none.  You can’t deduct the interest on your car loan, the interest on your credit cards or the interest you are paying on that loan for your new big screen TV.  However, if you owned a business and your business took out a loan to buy a car, your business could deduct the interest on that car loan against the profits for that year.

So what is the morale of the story?  Your home loan is probably the best debt you can have.  If you get the opportunity to roll your credit card debt, car loan, etc. into your home mortgage, do it!  Not only are you going to get a lower interest rate, but you are also going to be able to deduct the interest payments from your ordinary income!