Being in debt doesn’t necessarily mean you’ll owe more come tax time.

If you’re in debt, chances are money is constantly on your mind. Whether it’s thinking about upcoming bills, coming up with monthly budgets, or saving for expenses; money can be the cause of many stressors. But a large tax bill at the end of the year doesn’t necessarily need to be one.

That’s because there are tax relief deductibles and programs offered to people in poor financial situations. So, if you’re in debt stop avoiding filing your return and review our top ways that debt can actually reduce your bill this tax season.

Claiming Interest

It should come as no surprise that interest paid on any type of personal loan is not tax-deductible. But there are certain types of loans that are. For example, the interest that is paid on student loans, business loans, and mortgages can typically be deducted annually on tax returns. Claiming this deduction would reduce taxable income for the year. In turn, lowering the tax bill.

Mortgage Interest

To qualify for a deduction on interest charged throughout a tax year on a mortgage the person must have taken out the loan to purchase a primary residence. This means if it’s an investment property or a secondary home then it will not qualify.

If the mortgage was issued by a mortgage credit certificate (through a government program for low-income housing) then the person may be able to claim a tax credit for it. Doing this will reduce the amount of tax owed.

Business Expenses

If you own a business and have a personal loan or credit card that is used to finance things for it then you might be able to claim the interest that is paid on those items.

But you must be able to provide proof that the items purchased are for legitimate business reasons and that you are the person who is legally liable for the loan. Otherwise, your claim might get denied. So be sure to have detailed itemized receipts for each purchase, along with any proof-of-use and bank statements that demonstrate exactly how much you paid in interest.

If an item was purchased for business use but also happened to be used for personal reasons (such as a car or a computer) then you can deduct the loan interest that’s proportionate to the amount of business use it received. For example, if you used the item 50% for personal use and 50% for business-related work then you can deduct 50% of the interest paid on it. Again, you will need to ensure you have all your receipts and documentation for these purchases, or you risk being denied the amount.

Student Loan Interest

If you’ve paid interest on a student loan and earn less than $85,000 or $175,000 for a joint filing (of your modified adjusted gross income) you can claim the interest you paid on it throughout the year as a tax deduction. This means that the amount claimed will be classified as an adjustment to income and can lower the amount of income that’s subject to federal income tax (up to $2,500).

In order to qualify for this deduction, the loan will have had to have been taken out in your name, your spouse, or your dependents and used for qualified educational expenses. (such as tuition, books, student activities, etc.)

Children’s Education Loans

If you have a child who is listed as a dependent on your taxes and you are currently paying off a student loan for them, you will be able to claim the amount you’ve spent on interest. Keep in mind that the dependent cannot be claimed by anyone else, and the loan will have had to have been used for qualified educational expenses and taken out in your name.

Ultimately, debt shouldn’t prevent you from filing your taxes regardless of how stressful of a situation you might be in.

If you’d be interested in knowing what services would help you reduce your tax liability, or what deductions you’d be eligible for give us a call at 407-328-5001.

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