Understanding Interest Expense and the New Rules

As a taxpayer, you are likely aware of the fact that you can deduct interest expenses in some cases. Generally, areas in which you can deduct interest expenses include:

l  Student loan interest

l  Personal interest

l  Qualified resident indebtedness interest

l  Business interest

l  Investment interest

And, while it’s been the case that you can deduct interest in these areas for quite some time, there are some new rules affecting the 2018 tax year. These rules are being put into play by the Tax Cuts and Jobs Act.   

New Rules to Know

One big change is a lowering of the acquisition indebtedness limit on qualified resident indebtedness. This limit has been lowered to $750,000 for any loans that were taken out of after December 15 of 2017.

Something else to take note of is the fact that the separate deduction for home equity indebtedness is no longer in effect or available.

Further changes include that you can no longer deduct investment expenses when calculating net investment income while determining your deduction for investment interest. Also, a new rule says that if any debt funds are ultimately used for multiple purposes, the interest on the debt has to be allocated in the same way.

All of these rules just apply to individual taxpayers, while business taxpayers have their own set of new rules to follow.

Obviously, with so many changes and with these rules being so complex, it’s a good idea to seek some professional advice when determining if and how the new requirements affect you. Having an accountant or a good financial adviser is the best way to navigate these changes, as well as other changes that are now in play for the 2018 tax year, which is quickly coming to an end.