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These 3 tax tips can save you big


SmartAsset: JP Morgan reveals 3 tips to cut taxes

SmartAsset: JP Morgan reveals 3 tips to cut taxes

With interest rates rising, it’s increasingly important to make sure you’re taking advantage of all the interest deductions you’re entitled to so you can avoid paying more taxes than necessary. Three particularly important interest deductions, according to JPMorgan, which explains how to use those deductions. The bank also describes how to maintain interest deduction when switching from a floating-rate loan to a fixed-rate loan. Consider working with a Financial Advisor as you coordinate your borrowing and tax planning.

Why deductible interest is more important now

With interest rates already rising in the first quarter of 2022, how you borrow can be as important as how much you borrow. By the middle of the year Federal Reserve raised interest rates three times to combat the highest inflation in four decades. At least one more and perhaps two more federal funds rate hikes are expected.

U.S. tax law does not treat all forms of interest equally. There are three main deductions that savers, business owners, and investors should keep in mind. One is mortgage interest ratethe second is borrowing to make taxable investments and the third is borrowing for business.

Borrow to buy a house

The government allows you interest deduction if a loan is used to construct, purchase, or make fundamental improvements on an eligible property.

Taxpayers can deduct interest up to $750,000 on a principal secured by one of their primary residence and one of their secondary residence. This deduction is also available – subject to certain restrictions – for mortgage refinancing. The rules for older mortgages are slightly different: Mortgage interest rate due on debt incurred before December 16, 2017, with a deduction for debt up to $1 million. This deduction is also for refinance debt.

Take care to ensure that your loan amount can be traced using an identifiable deduction, known as the “tracing doctrine,” and that you keep proof of the use this.

Borrow for taxable investments

SmartAsset: JP Morgan reveals 3 tips to cut taxes

SmartAsset: JP Morgan reveals 3 tips to cut taxes

With a principal limit of $750,000 on the mortgage interest deduction, those considering buying a more expensive home may not see the benefit as significant as the benefit of borrowing. invest in taxable securities. You can deduct interest paid on debt proceeds that can be traced back to the purchase of taxable investments, up to a maximum of all your investment income for that year. Also, unlike mortgages, there’s no limit to how much principal you can make this deduction, as long as you have enough investment income, from all sources, to use it. .

Bonus: If the investment return paid in a given year is higher than your investment income, any excess deductions can be carried forward indefinitely.

While rental income is not generally considered investment income, here are five types of income that the IRS considers investment income:

  • Royalties and annuities

  • hedge fund and private equity income

  • Interest, such as from corporate bonds

  • Dividends are not eligible for the preferential tax rate of 20%

  • Qualifying dividends are taxed preferentially and long-term capital gains (to the extent taxpayers choose to tax them at ordinary income)

Borrow for business

If you are significantly involved in the business as a principal, the government allows you to deduct interest on the loan used to purchase equity or to contribute additional capital to the commercial operation. operating or an enterprise organized as a rotating legal entity. Such entities including S corporations, LLCs and partnership.

JP Morgan stated in a recent article: “If the debt is directly traceable to the use of the business, the principal business interest expense will be deducted directly from all income of the borrower. tax payment, including non-business income”.

Excess deductions can be carried forward.

A trap to avoid

JP Morgan warns about the misconception some investors and business owners have about the deductibility of interest payments. The misconception is that any “swap” of a floating-rate contract that exchanges a floating-rate on a loan for fixed-rate recurring payments automatically maintains its capacity. the amortization of the interest that will be paid on the new loan, fixed interest debt they have.

But that is not necessarily true. In order to effectively fix the rate for tax purposes and ensure the deduction of interest paid, swaps are subject to many additional legal requirements, including concurrent execution. floating rate loans with fixed rate contracts, as well as similar economic terms in both contracts. Consulting with a financial advisor to see how to maintain the interest deduction can be a wise move.

Last line

SmartAsset: JP Morgan reveals 3 tips to cut taxes

SmartAsset: JP Morgan reveals 3 tips to cut taxes

As interest rates rise, so does the allure of optimizing your U.S. income tax deductions. Loans for residence or second residence, loans to make taxable investments, and loans for businesses of which you are the owner are all subject to interest payment deductions. But be careful as there are standards and restrictions on some of these available deductions. Finally, be sure to keep proof that your loan amount can be traced back to the use of an identifiable deduction.

Tax advice

  • One Financial Advisor can help you minimize your tax costs as well as maximize your return on investment. Finding a qualified financial advisor is not difficult. SmartAsset’s free tool connects you with up to three financial advisors serving in your area, and you can interview the right advisors for you for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goals, start right now.

  • Income in the US is taxed by the federal government, most state governments, and many local governments. The federal income tax system is progressive, so the tax rate increases as income increases. Free to use SmartAsset income tax calculator to get a quick estimate of what you will owe the federal government.

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