Interest

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Question: When is interest deductible?

Answer: Interest is generally grouped into the following categories: business, mortgage, education, investment, or personal. Except for personal interest, all the other categories may be tax-deductible. Your recordkeeping and your individual situation will determine what category your interest falls into and whether it is deductible. Here are some general guidelines:

Business interest – Interest paid in your trade or business is fully deductible.

Student loan interest – You can deduct up to $2,500 a year for interest paid on certain student loans. You don’t have to itemize to claim this deduction, but the deduction is phased out if your income exceeds certain levels.

Investment interest – If you itemize, you can deduct investment interest to the extent you have investment income, such as interest and dividend income. You must itemize your deductions to claim this expense. If you borrow money to make tax-exempt investments, the interest expense is not deductible.

Mortgage interest – Within certain limits, interest on your first and second residence and on home equity loans is tax-deductible if you itemize.

Personal interest – Interest paid on credit cards, personal vehicles, consumer loans, etc., is not deductible.

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