In the tax business, we see a lot of people trying to take deductions for expenses that the IRS doesn’t really consider deductible. One of the most common expenses that people struggle with is interest. There are many different types of interest, and many people have a hard time determining what interest is deductible and what is not. This article will clarify this. There are only three types of interest that you can deduct on your personal tax return.

The first type of deductible interest is the interest you pay on your mortgage for your first and second homes. The bank must send you this amount each year on a 1098 form. This interest is reported on Schedule A as an itemized deduction. One thing you may not know is that RVs and houseboats can be considered a second home and therefore the interest on them is also deductible on Schedule A. However, it is important to note that you will not receive a form 1098 that details the interest paid on an RV or houseboat, so you’ll need to contact 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 buy something on credit or with a loan as an employee business expense. This is also deducted on Schedule A as an itemized deduction. However, employees’ business expenses are limited to 2% of their income. Here’s an example of being able to deduct interest as an employee business expense. Let’s say you bought a laptop on credit because your employer requires you to have one for working from home and taking business trips. In this case, the purchase price of the computer and interest are deductible as business expenses of the employee.

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 year-end statement from the brokerage company. You will report this type of interest expense as an itemized deduction on Schedule A.

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

If you own a business, you should know that the interest of people is very different from that of companies. You can learn more about business interest deductions and personal interest deductions on our website at http://www.avoidbeingaudited.com.