Question

Pablo and Adriana, a married couple who file a joint return, purchased a $190,000 home making a $38,000 cash down payment and taking out a mortgage for the balance of the purchase price. They also paid the mortgage company $3,000 in points for originating the loan at closing. They paid $7,000 in interest on the mortgage this year. They also purchased a new car for $28,000 with a car loan from their credit union, paying $975 in interest for the year. What is their deduction for interest expense if they itemize their deductions?

Answer 1

Interest is an amount you pay for the use of borrowed money. Some interest can be claimed as a deduction or as a credit. To deduct interest, you paid on a debt, review each interest expense to determine how it qualifies and where to take the deduction.

Types of interest deductible as itemized deductions on Form 1040, Schedule A.pdf, Itemized Deductions, include:

• Investment interest (limited to your net investment income) and
• Qualified mortgage interest including points (if you're the buyer)

types of interest not deductible include personal interest, such as:

• Interest paid on a loan to purchase a car for personal use.
• Credit card and instalment interest incurred for personal expenses.
• Points (if you're a seller), service charges, credit investigation fees, and interest relating to tax-exempt income, such as interest to purchase or carry tax-exempt securities.
• Qualified mortgage interest includes interest and points you pay on a loan secured by your main home or a second home. Your main home is where you live most of the time, such as a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat. It must have sleeping, cooking, and toilet facilities. You can also treat amounts you paid during the year for qualified mortgage insurance as home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.
• A second home can include any other residence you own and choose to treat as a second home. You don't have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as qualified residence interest

Qualified mortgage interest and points are generally reported to you on Form 1098.pdf, Mortgage Interest Statement, by the financial institution to which you made the payments. The following mortgages yield qualified mortgage interest and you can deduct all of the interest on these mortgages:

• A mortgage you took out on or before October 13, 1987 (grandfathered debt)
• A mortgage taken out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt) but only if throughout the year these mortgages plus any grandfathered debt totaled $1 million or less. The limit is $500,000 if you're married filing separately.
• Home equity debt other than home acquisition debt taken out after October 13, 1987, up to a total of $100,000. The limit is $50,000 if you're married filing separately. Home equity debt other than home acquisition debt is further limited to your home's fair market value reduced by the grandfathered debt and home acquisition debt.

TAKING THE ABOVE MENTIONED POINTS INTO CONSIDERATIONS AND ASSUMING THAT THE LOAN IS QUALIFIED MORTAGAGE INTEREST. THE TOTAL DEDUCTION AVAILABLE ARE 3000+7000= 10000$.

THE CAR LOAN INTEREST IS NOT ALLOWABLE SINCE IT IS PURCHASED FOR PERSONAL USE.