CHAPTER 12

Borrowing and Interest

Alert
At the time this book was printed, Congress had not extended numerous breaks for 2012 that had expired at the end of 2011. Check the online supplement in February 2013 at www.jklasser.com or www.barbaraweltman.com to see whether these breaks apply for 2012 returns.

With the prices of things rising, jobs tight, and investments performing weakly, it seems that every paycheck is stretched to the limit. We often choose or are forced to rely on credit to pay for the things we want or need. Whether you are a borrower or a lender, you may be eligible for tax breaks with respect to loan activities.

This chapter explains:

  • Home mortgage interest
  • Student loan interest
  • Investment-related loans
  • Business interest
  • Accrued interest on bond purchases
  • Below-market loans
  • Bad debts
  • Loan forgiveness

For more information, see IRS Publication 550, Investment Income and Expenses.

Home Mortgage Interest

If you are a homeowner repaying a mortgage, you can deduct the interest portion of your payments. There is no dollar limit on how much interest you can deduct. However, the law limits the amount of borrowing you can take into account in figuring your deductible interest on loans taken after October 14, 1987.

  • For acquisition indebtedness to buy, build, or substantially renovate your home: $1 million
  • For home equity debt, which is a loan other than acquisition indebtedness secured by your home (such as a home equity line of credit): $100,000

In effect, you ...

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