Interest Deduction

AAA

DEFINITION of 'Interest Deduction'

A deduction for taxpayers who pay certain types of interest. Interest deductions reduce the amount of income subject to tax. The two main types of interest deductions are for home mortgage and home equity loan interest, and margin account interest. These deductions are allowed primarily to encourage home ownership and investment activity. Other interest deductions can come from the interest paid on student loans.

INVESTOPEDIA EXPLAINS 'Interest Deduction'

Interest deductions face some limitations. Taxpayers must be able to itemize in order to claim either of the deductions listed above, and margin account interest and other investment-related expenses are only deductible for amounts in excess of 2% of adjusted gross income. Additionally, margin loan interest is only tax-deductible if the loan is used to purchase taxable investments, and the deduction is limited to net investment income. However, once these conditions are met, it is possible to reduce or even eliminate one's taxable income if a sufficient amount of interest has been paid.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Mortgage Interest Deduction

    A common itemized deduction that allows homeowners to deduct ...
  3. 1040 Form

    The standard Internal Revenue Service (IRS) form that individuals ...
  4. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  5. Deduction

    Any item or expenditure subtracted from gross income to reduce ...
  6. Margin Account

    A brokerage account in which the broker lends the customer cash ...
Related Articles
  1. Mortgages: Fixed-Rate Versus Adjustable-Rate
    Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

  2. A Tax Primer For Homeowners
    Taxes

    A Tax Primer For Homeowners

  3. Understanding Your Mortgage
    Personal Finance

    Understanding Your Mortgage

  4. Tax Deductions On Mortgage Interest
    Taxes

    Tax Deductions On Mortgage Interest

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center