Debt Deductions: Does Borrowing Give You a Tax Writeoff?

Some types of interest are deductible, while others aren't. Figure out which ones are here.

Feb 16, 2014 at 2:10PM

It's tax time, and everyone's scurrying to find deductions on their returns. If you have loans outstanding, the interest you pay might be tax-deductible -- but it might not. How can you tell?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through the various types of debt and whether you can write off interest. Dan notes that mortgage debt is almost always deductible as an itemized deduction, with amounts up to $1 million. That's a big benefit for mortgage lenders Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC), as it encourages borrowing that might not otherwise happen. Dan also points out that home equity loans are often deductible, although subject to a smaller $100,000 limit in many cases. Dan turns to investment-related interest, noting that it's deductible to the extent that it produces taxable investment income. Investing in iShares National AMT-Free Muni ETF (NYSE MKT:MUB) or other tax-exempt investments, however, doesn't allow you a deduction. Student loan debt is deductible for some people below applicable income limits, and the advantage it has is that you don't have to itemize to take a deduction if you qualify. Meanwhile, personal loans like car loans and credit cards don't qualify for deductions, leaving automakers Ford (NYSE:F) and General Motors (NYSE:GM) at a disadvantage to banks and homebuilders because of the lack of an equal tax break.

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Dan Caplinger owns warrants on Bank of America and Wells Fargo. The Motley Fool recommends Bank of America, Ford, General Motors, and Wells Fargo and owns shares of Bank of America, Ford, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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