Interest Deduction


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.

  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. Deduction

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

    A brokerage account in which the broker lends the customer cash ...
  5. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  6. 1040 Form

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