Before you Borrow

You need a loan. You compare alternatives and choose the loan with the most favorable rate, repayment terms, service history, etc. Do you also consider the tax implications? If there is a way to structure the loan so that the interest may be tax deductible, you should do so. The real cost of borrowing will be less. Much less, in fact. Following are several options:

• Business loan interest - Interest paid on loans taken to finance business expenditures are generally deductible as a trade or business expense.
• Consumer debt interest – You cannot deduct interest on loans taken to buy personal items, such as cars and appliances. However, see the next section regarding “home equity debt.”
• Home mortgage/home equity loan interest - In general, you can deduct interest paid on up to $1 million of home “acquisition debt,” mortgage loans taken to buy or build a primary and/or a second residence. On top of this deduction, the law allows an itemized deduction for interest paid on up to $100,000 of “home equity debt” – no matter how the loan proceeds are used.
• Investment debt - If you borrow money to buy or carry taxable investments, the interest you pay on the loan is deductible as an itemized deduction, subject to a limitation based on your net investment income. A margin loan from a brokerage is an example of investment debt.
• Student loan interest - Qualified student loan interest of up to $2,500 a year is deductible, subject to an income-based phase-out.

Additional factors, such as alternative minimum tax and the itemized deduction limitations that apply to higher income taxpayers could affect your interest deductions. Involve your banker and tax advisor in your decision on how to satisfy your need for money at the lowest after-tax cost.