Put Your Debt to Work
Is your debt working for you? Managing your debt may help you reduce your current income taxes while, at the same time, potentially lowering your debt payments.
Start by reviewing your current and potential liabilities to make sure that you are taking advantage of all potential income-tax deductions. Although the interest expense on most personal loans (e.g., credit-card debt, auto loans) is not deductible, consider restructuring these debts in favor of loans that do offer deductible interest expense.
Also review your mortgage and investment loans to assure the deductibility of interest expense. Different limits now apply to consumer-, mortgage- and investment-interest expenses, and determining deductibility can be difficult. Always consult you tax adviser to hep you make the appropriate decision.
Personal interest
Personal Interest expense is not deductible. If you have personal interest expense, consider the following methods for restructuring your debts:• Home-equity loans can be used to repay consumer debt.• Margin loans may be used to finance taxable portfolio purchases and free up cash for consumer purchases. Make sure debts incurred for investments can be traced to the investments. Debt classification is based on the use of the proceeds. For example, a margin loan to buy a new car or house is nondeductible consumer debt, not investment-interest expense.
Mortgage interest
Mortgage interest on first and second homes is deductible, provided that the funds are used for home acquisition or substantial improvement of the home which is used as collateral and that they do not exceed a total of $1 million.1
In addition, interest on home-equity loans up to $100,000 on first or second residences is fully deductible. These loans may be used for almost any purpose and will still be deductible unless used for the purchase of tax-free bonds, annuities and single-premium life insurance.
Consider borrowing up to $100,000 against the equity in your home for consumer purchases or pay off outstanding consumer loans. You will be able to deduct 100% of the qualifying interest expense.
If you own rental real estate, the passive-loss deduction rules may limit your ability to deduct expenses in excess of rents (including interest expense) against other income.
Consider converting rental real estate to a second home and borrowing up to $100,000 against the equity (if there is no other home equity loan outstanding), to at least preserve the deductibility of your interest expense.
Investment interest expense
Your interest expense on margin loans (and other types of investment interest expense) may be deductible if your investment income is greater than your investment expenses. In general, any investment-interest expense that is not deductible this year can be carried over to offset net investment income in future years.
Take short-term gains, if feasible, to ensure deductibility of investment-interest expense.
Monitor your margin interest and investment income during the year and consider taking short-term gains at year end, if necessary, to make all investment interest deductible.
Pay interest expense before year end to create a current-year deduction.
Credits to the margin account for interest, dividends, sales proceeds or other deposits equal to the interest payment. If insufficient credits exist, you could make an additional deposit before year end to make up the deficit.
Be aware that interest expense incurred to “purchase” or “carry” tax-exempt securities is not deductible. This would limit the deduction even if you own tax-exempt securities in one brokerage account and you purchase taxable securities on margin in another account.
Start by reviewing your current and potential liabilities to make sure that you are taking advantage of all potential income-tax deductions. Although the interest expense on most personal loans (e.g., credit-card debt, auto loans) is not deductible, consider restructuring these debts in favor of loans that do offer deductible interest expense.
Also review your mortgage and investment loans to assure the deductibility of interest expense. Different limits now apply to consumer-, mortgage- and investment-interest expenses, and determining deductibility can be difficult. Always consult you tax adviser to hep you make the appropriate decision.
Personal interest
Personal Interest expense is not deductible. If you have personal interest expense, consider the following methods for restructuring your debts:• Home-equity loans can be used to repay consumer debt.• Margin loans may be used to finance taxable portfolio purchases and free up cash for consumer purchases. Make sure debts incurred for investments can be traced to the investments. Debt classification is based on the use of the proceeds. For example, a margin loan to buy a new car or house is nondeductible consumer debt, not investment-interest expense.
Mortgage interest
Mortgage interest on first and second homes is deductible, provided that the funds are used for home acquisition or substantial improvement of the home which is used as collateral and that they do not exceed a total of $1 million.1
In addition, interest on home-equity loans up to $100,000 on first or second residences is fully deductible. These loans may be used for almost any purpose and will still be deductible unless used for the purchase of tax-free bonds, annuities and single-premium life insurance.
Consider borrowing up to $100,000 against the equity in your home for consumer purchases or pay off outstanding consumer loans. You will be able to deduct 100% of the qualifying interest expense.
If you own rental real estate, the passive-loss deduction rules may limit your ability to deduct expenses in excess of rents (including interest expense) against other income.
Consider converting rental real estate to a second home and borrowing up to $100,000 against the equity (if there is no other home equity loan outstanding), to at least preserve the deductibility of your interest expense.
Investment interest expense
Your interest expense on margin loans (and other types of investment interest expense) may be deductible if your investment income is greater than your investment expenses. In general, any investment-interest expense that is not deductible this year can be carried over to offset net investment income in future years.
Take short-term gains, if feasible, to ensure deductibility of investment-interest expense.
Monitor your margin interest and investment income during the year and consider taking short-term gains at year end, if necessary, to make all investment interest deductible.
Pay interest expense before year end to create a current-year deduction.
Credits to the margin account for interest, dividends, sales proceeds or other deposits equal to the interest payment. If insufficient credits exist, you could make an additional deposit before year end to make up the deficit.
Be aware that interest expense incurred to “purchase” or “carry” tax-exempt securities is not deductible. This would limit the deduction even if you own tax-exempt securities in one brokerage account and you purchase taxable securities on margin in another account.
There are other tax-cutting strategies in addition to those mentioned here. If you would like assistance in selecting tax-saving strategies that make the most sense in your situation, contact us today!