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.

BREAKING DOWN '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 Interest Deduction

    A common itemized deduction that allows homeowners to deduct ...
  2. IRS Publication 936

    A document published by the Internal Revenue Service (IRS) that ...
  3. Schedule A

    Schedule A is a U.S. income tax form that is used by taxpayers ...
  4. Deductible

    1. The amount you have to pay out-of-pocket for expenses before ...
  5. Above The Line Deduction

    Above the line deductions are certain types of deductions that ...
  6. Itemized Deduction

    A deduction from a taxpayer's taxable adjusted gross income that ...
Related Articles
  1. Taxes

    An Overview Of Itemized Deductions

    Not taking the standard deduction this year could save you hundreds of dollars.
  2. Taxes

    Calculating the Mortgage Interest Tax Deduction

    The amount of money you save by paying your mortgage off quickly will far exceed any benefit from the mortgage interest tax deduction.
  3. Taxes

    Increase Your Tax Refund With Above-The-Line Deductions

    Find out about these deductions and how you can use them to lower your tax bill.
  4. Taxes

    Why You Should Itemize Your Tax Deductions

    This strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
  5. Insurance

    What's a Deductible?

    With insurance, a deductible is the amount of money the insured pays out-of-pocket before the insurance company pays for the loss.
  6. Taxes

    Top Tax Tips to Deduct Investment Management Fees

    Investment expenses can be deducted by those who meet three main criteria. Here's what they are and how they work.
  7. Taxes

    Tax Deductions on Mortgage Interest

    If you're a homeowner, this is one item you want to understand and use on your return.
  8. Taxes

    Top Tax Deductions Not to Overlook

    If you want to pay as little as possible in taxes, it's important to learn about all the different credits and deductions available. Here's a primer.
  9. Taxes

    Top Tax Deductions For Brokers

    If you are paying out of pocket, you can make your business expenses work for you at tax time.
  10. Personal Finance

    Deducting Interest on Your Second Mortgage

    It's a little tricky, but the effort can save you thousands.
RELATED FAQS
  1. Are personal loans tax deductible?

    Find out whether interest on personal loans is tax deductible and what types of loan interest can be used to reduce your ... Read Answer >>
  2. What are the deductions taken to determine AGI (adjusted gross income)?

    Read more about the deductions taken to arrive at adjusted gross income, or AGI, including the differences between above ... Read Answer >>
  3. How do I know whether to itemize deductions or take the standard deduction?

    Taking the standard deduction is the easiest and most common method chosen by filers, but many taxpayers may wind up paying ... Read Answer >>
  4. How is the deductible I paid for my insurance claim treated for tax purposes?

    Find out how your health insurance deductible is treated for tax purposes and under what conditions you may be able to deduct ... Read Answer >>
  5. Is the interest on my student loan tax deductible on my federal income taxes?

    Find out how you can deduct interest payments for qualified student loans from your income taxes, and learn about restrictions ... Read Answer >>
  6. What Home-Buying Costs Can I Deduct from Taxes?

    Except for interest, points, real estate taxes and PMI, costs to acquire a home increase the asset’s tax basis and are not ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center