Skip to main content
Advertiser Disclosure
We do receive compensation from some partners whose offers appear on this page. We have not reviewed all available products or offers. Compensation may impact the order in which offers appear on page, but our editorial opinions and ratings are not influenced by compensation.

Ascent-logo

  • Credit Cards
  • Banking
  • Brokerages
  • Loans
  • Mortgages
  • Knowledge
  • Latest Picks
  • Search Icon Click here to search

Credit Cards

Top Picks
  • Best of February 2021
  • Cash Back
  • Balance Transfer
  • Travel
  • 0% APR
  • Rewards
  • Bad Credit
Knowledge
  • Beginners Guide to Credit Cards
  • How to Rebuild Your Credit
  • Maximize Your Credit Card Rewards
  • Learn More About Credit Cards
Credit Card Tools
  • Compare Cards
Looking for a new credit card?

Explore the best credit cards in every category as of February 2021.

Get started!

Banking

Top Picks
  • Best Savings Accounts
  • Best Bank Accounts
  • Best Money Market Accounts
  • Best CDs
  • Best Checking Account Bonuses
Knowledge
  • Beginners Guide to Banking
  • Everything You Need to Know About Savings
  • Money Market Accounts Made Easy
  • Learn More About Banking
Looking for a place to park your cash?

Check out our top picks of the best online savings accounts for February 2021.

Get Started!

Brokerages

Top Picks
  • Best Brokers of February 2021
  • Best Online Brokers for Beginners
  • Best Options Brokers
  • Best IRA Accounts
  • Best Roth IRA Accounts
  • Best Robo Advisors
Knowledge
  • How to Open a Brokerage Account
  • Beginner's Guide to Brokerages
  • Learn More About Brokerage
Just getting started?

Explore our picks of the best brokerage accounts for beginners for February 2021.

Get Started!

Loans

Top Picks
  • Best Loans of February 2021
  • Best Personal Loans for Bad Credit
  • Best Loans for Debt Consolidation
  • Best Low-Interest Personal Loans
  • Best Personal Loans for Good Credit
  • Best Personal Loans for Fair Credit
Knowledge
  • Personal Loans Made Easy
  • Debt Consolidation Guide
  • How to Pay Off Debt
  • Learn More About Loans
Thinking about taking out a loan?

Before you apply for a personal loan, here's what you need to know.

Get Started!

Mortgages

Top Picks
  • Best Mortgage Lenders of February 2021
  • Best Mortgage Lenders for Poor Credit
  • Best Refinance Lenders
  • Best VA Mortgage Lenders
Knowledge
  • First Time Homebuyers Guide
  • Home Loans Made Easy
  • The Complete Guide to Refinancing
  • How to Get a Mortgage with Bad Credit
  • Learn More About Mortgages
Tools & Calculators
  • Mortgage Calculator
Compare Rates
  • Today's Mortgage Rates
  • Refinance Rates
  • 15-Year Mortgage Rates
  • 20-Year Mortgage Rates
  • 30-Year Mortgage Rates
  • Jumbo Mortgage Rates
  • VA Loan Rates
  • 5/1 ARM Rates
  • 7/1 ARM Rates
  • FHA Mortgage Rates

Knowledge

Knowledge Section
  • All Articles
  • Credit Card Articles
  • Banking Articles
  • Brokerage Articles
  • Personal Loan Articles
  • Mortgage Articles
  • Personal Finance Articles
Recent Articles
  • Mortgage Applications Drop 11% -- The Start of a Trend?

    Mortgages

    Mortgage Applications Drop 11% -- The Start of a Trend?
  • Stimulus Check Update: Lawmakers Question Minimum Wage Hike as Relief Bill Moves Forward

    Personal Finance

    Stimulus Check Update: Lawmakers Question Minimum Wage Hike as Relief Bill Moves Forward
  • Why Home Warranties Aren't All They're Cracked Up to Be

    Mortgages

    Why Home Warranties Aren't All They're Cracked Up to Be
  • Today's Mortgage Rates -- February 25, 2021: Rates Climb Once Again

    Mortgages

    Today's Mortgage Rates -- February 25, 2021: Rates Climb Once Again
  • The Ascent
  • Knowledge
  • Banking

When Is Interest on Debt Tax Deductible?

by Christy Bieber | June 13, 2019

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

1040 form with pen and calculator.

Image source: Getty Images

Paying interest can get really expensive, so it's natural to look for any method to reduce interest costs that you can find. One possible way you can defray some of your interest expenses is to take a tax deduction for the interest you pay. Unfortunately, deducting interest expenses is only an option on limited types of loans.

Until the Tax Reform Act of 1986, it was possible to deduct interest on more types of debt -- including on credit card debt. Unfortunately, this mid-1980s tax reform law eliminated the deduction for personal interest, so credit card, personal loan, and medical loan interest can no longer be deducted on your tax return.

The good news is, there are still some situations when interest on debt is tax deductible. Here are four of them.

1. Interest on mortgage and home equity debt

If you borrow for a home, you can take a mortgage interest deduction. You can take a deduction on interest on mortgages up to $750,000 if you purchased your home after Dec. 16, 2017, or on up to $1 million in mortgages if you bought your house prior to that December date.

You can also take a deduction on interest you pay on home equity loan debt, but only if you use the proceeds from the home equity loan to build, buy, or substantially improve the home that secures the home equity loan.

To claim a deduction for interest paid on mortgage debt or home equity loan debt, you need to itemize on your tax return. Because the standard deduction was nearly doubled beginning in 2018 as a result of the Tax Cuts and Jobs Act, it makes no financial sense for many taxpayers to itemize because the standard deduction exceeds the value of itemized deductions they could claim. So don't assume that just because mortgage or home equity loan interest is tax deductible that you'll always get to claim this deduction.

2. Interest on business debt

If you're operating a business and you take out a loan for business purposes -- including a line of credit or a mortgage on a business property -- you can generally deduct the interest associated with the business loan.

However, there are certain conditions that must be met for the interest to be tax deductible. For example, you and the lender must both intend that the business loan be repaid, and you must be legally obligated to repay the debt. The lender you owe money to also must be a legitimate creditor, with an arms-length relationship -- not a family member who loaned you money to start the business who doesn't legitimately expect to be paid back.

You'll need to be able to provide proof of the business debt in the event that you're audited if you claim a deduction for interest paid. If your business has average gross receipts of $25 million or more, the deduction for interest on business debts is capped at 30% of your company's earnings before interest, taxes, depreciation, and amortization.

3. Interest on margin debt

If you borrow money to invest, it's possible you could claim a deduction on your taxes for any interest on margin debt that you incur. That's because you can take a deduction for investment interest expenses as calculated on IRS Form 4952.

You'll have to itemize on your taxes to claim this deduction. The value of the deduction is capped at the net taxable investment income you're claiming during the tax year. If you don't have net taxable investment income or if your investment income is lower than the margin interest you paid, you can carry over the remaining interest expense. This means you could potentially deduct the interest from net taxable investment income declared in the next tax year.

How much can you save if your debt is tax deductible?

The specific amount of savings that comes from being able to deduct interest you pay on debt will vary depending upon the amount of interest you're able to deduct, as well as your tax bracket. Deductions reduce your taxable income, so you don't pay taxes on the income you'd have otherwise been taxed on had you not claimed the deduction.

If you can reduce a very high income by $10,000 because you pay $10,000 in mortgage interest and the $10,000 in income otherwise would've been taxed at 35%, you'd save much more. In this scenario, your tax savings thanks to being able to deduct the interest on your mortgage debt would be $2,500.

The higher your tax bracket, and the more interest you pay on your debt, the more savings you'll realize if your debt is tax deductible.

Understand your options for tax-deductible debt

Whenever possible, it makes sense to take out loans with tax-deductible interest. It would typically make no sense, for example, to use a personal loan to pay for school instead of a loan with tax-deductible interest. Of course, it's important to look at the big picture and consider the loan terms and total costs of financing before you make a choice on which loan is right for you.

These savings accounts are FDIC insured and can earn you 12x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2021.

Two top online savings account picks

Rates as of Feb. 15, 2021 Ratings Methodology
Logo for CIT Bank Savings Builder
Logo for American Express® High Yield Savings Account
CIT Bank Savings Builder American Express® High Yield Savings Account
Member, FDIC Member, FDIC
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Open Account

On CIT's Secure Website.

Open Account

On American Express' Secure Website.

Read Review Read Review

APY: Up to 0.45%

APY: 0.50%

Best For: No monthly maintenance fee

Best For: High APY

Min. to earn APY: $25k or $100 monthly deposit for highest tier

Min. to earn APY: $0

About the Author

Christy Bieber
Christy Bieber icon-button-linkedin-2x

Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.

Share This Page
Facebook Icon This icon shares the page you are on via Facebook
Blue Twitter Icon Share this website with Twitter
LinkedIn Icon This image links to share the page over LinkedIn.
Email Icon Share this website with email
Bank CD rates has a Disclosure Policy. The Author and/or Bank CD rates may have an interest in companies mentioned.

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

Featured Offer

Amex_Savings_BlueBox_Double_Line_226x142.png

High APY and low fees

Open Account

Related Articles

Piggy bank surround by cash stacks image for Best Online Savings Accounts for 2021

Best Online Savings Accounts for 2021

Interest spelled out on a calculator image for Best CD Rates

Best CD Rates

Man holding credit card and looking at computer screen laughing with woman image for What is APY and What Does it Mean for Your Savings Account?

What is APY and What Does it Mean for Your Savings Account?

Couple looking at a paper bill together at a table worried image for Is it Time to Switch Banks?

Is it Time to Switch Banks?

Featured Articles

Best Online Savings Accounts for 2021

Best CD Rates

What is APY and What Does it Mean for Your Savings Account?

Is it Time to Switch Banks?


We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from Bank CD rates editorial content and is created by a different analyst team.

The Ascent Logo

Best CD Rates service that rates and reviews essential products for your everyday money matters.

btn_facebook-yellow btn_twitter-yellow btn_instagram-yellow

Copyright © 2018 - 2021 The Ascent. All rights reserved.

About The Ascent
About Us Contact Us Newsroom How We Make Money Editorial Integrity Ratings Methodology
Legal
Terms of Use Privacy Policy Accessibility Policy Terms and Conditions Copyright, Trademark and Patent Information
Learn
Credit Cards Banking Brokerage Loans Recent Articles

By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.

Back to Bank CD rates