How to Use Your Debt to Save on Taxes

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eHow Money Blog

Debt. It’s probably the most dreaded four-letter world in your financial life.  No surprise there, as the average American owes more than $47,000 to creditors like credit card and loan companies. The good news: You may be able to use your debt to help you save money on your taxes.

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“All debt is not created equal,” says Adrian Nazari, the CEO of personal finance website Credit Sesame. “Some debt gives you tax advantages and that can save people a lot of money if they know the right strategies.”

To be sure, you should aim for paying down your debt so that you can be debt free.  After all, interest payments can add up — a lot!

But we know that the reality for many of you is that you simply can’t pay down all your debt right now.  So why not — if you can — try to use it to save money on taxes?

Credit Sesame’s Nazari gives us a few tips on how to use your debt to save money on your taxes.

Know what debt is tax deductible, and what debt isn’t.
In many instances, the following types of debt are tax deductible: first and second mortgages, vacation or investment mortgage interest, business loans that are used for business expenses, interest paid to buy business related supplies, student loans, investment loans, says Nazari. The following types of debt are generally not tax deductible: personal loans, car loans, credit cards and consumer loans, he adds.

Use home equity strategically.
It can make tax sense (and save you money) to take out a home equity loan or home equity line of credit and use that to pay off high interest debts like credit cards or personal loans.  It makes tax sense because the interest paid on home loan debt is tax deductible in many instances. Plus, interest rates on home equity loans and lines of credit are low right now, so it can save you money in interest to do this too.  Just beware: If you don’t pay off this loan, you can lose your house.

Put your money in the right spots.
“If you are going to buy a home, but think you’ll also need to borrow for a car or other large purchases in the near future, put down less money on the home,” writes Nazari. The reason: “You have more tax deductible interest by financing more of your house and avoid more non-deductible auto or personal loan debt by paying cash.”  Just beware: If by putting less down on your home, you then have to pay private mortgage insurance, or PMI, that might eliminate the tax benefit.

Talk to your tax adviser if you’re pondering any of these moves.

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