It turns out that not all loans are the same when it comes times to pay your taxes. Did you know that when you take out a loan you could actually be reducing the amount of federal taxes you have to pay at the end of the year? Many loans may give you a tax credit which shrinks the yearly tax you owe and other kinds of loans may give you a tax deduction which lowers your taxable income. Just about everyone needs to borrow money from time to time and it’s smart to do your homework before jumping into a big situation involving money. Here’s a quick guide to which loans may qualify you for a tax credit, though obviously individual cases will vary.

School Loans: Did you know that many loans you take out for education could give you a tax advantage? You can, in many cases, deduct the interest you paid on the loan from your federal taxes. Not all education loans are eligible for this, but it’s a good way to reduce the taxes you pay, especially if you’re a cash-strapped student with a limited income. The interest you pay on most education loans can only be deducted if you make under a certain amount of money, based on your individual filing status.

House Mortgages: For many people their home is the biggest purchase they ever make, and paying a home loan can actually be a good way to reduce the amount of cash you owe on your federal taxes each year. Most house payment plans are designed so that you can deduct the amount of interest you pay on the loan every year. Out of all the loans that have tax deductions associated with them, house mortgages are probably the most talked about. Since most home loans are designed to be paid over thirty years, that means that purchasing a house can give you 30 years of possible tax deductions.

Home Equity Loans (HELOC): A home equity loan used to improve your home could eventually raise the value of your dwelling and give you even more equity over time. If your home is more valuable now than when you bought it then you might be able to take out a home equity loan and deduct the interest you pay on that loan. There are some restrictions about how much of your loan’s interest actually qualifies for a tax deduction. You can use a home equity loan for a number of things, you may be able to get additional tax deductions by using the money for house repairs. For many homeowners some of the cost of a home equity loan can be minimized with home repair tax deductions.

There are, of course, a lot of variables between these loans. Everyone will not be eligible for all the different tax benefits that these loans may offer. Sometimes your age, the amount of money you want to borrow and the purpose of the loan will limit the amount of money you can deduct from your taxes in any given year. Before you take out any of these loans you may want to talk with your tax professional to make sure the tax benefits apply to your individual situation. Sometimes applying for the right kind of loan can literally save you thousands of dollars on your income taxes, so it’s worth investing a little bit of time and energy to look into what sort of tax credits you are eligible for.

Want to learn more about the details of home loans? Visit our site to learn more about modifying a mortgage, upside-downmortgages and the home buyer tax credit extension.

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