Taxes And Your Debt

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When you are considering your financial situation in regard to controlling or minimizing your debt, strategies are often developed with little concern as to how they might affect your tax situation.  Here are a few things to think about when contemplating taxes and your debt.

The biggest single tax write-off in this country is mortgage interest.  When you make your mortgage payment every month, quite a large portion of those funds are going to the interest rather than the principal on your home.  Since this is true, tax-deductible interest can help offset your income.  Remember, the best way to reduce your tax liability is to reduce your income.

It used to be that homeowners took out a Home Equity Line of Credit in order to do repairs or improvements to their real estate property.  In these days, homeowners are using their Home Equity Line of Credit to finance almost anything from a new car to a vacation, and some are even putting the money into investments.  The reason for this is that a Home Equity Line of Credit is tax-deductible, just like mortgage interest.  Even if the Home Equity Line of Credit comes with a high interest rate, the tax deduction might defer some of that and make it a smarter way to get cash than some other types of loans.

It is always smart to calculate your options.  Some loans, like mortgages and a Home Equity Line of Credit come with tax benefits that can offset interest charges.  Always try to avoid paying large bills with credit cards, as these have high interest without any tax benefits.

There are some very smart computer programs available that can help you manage your debt with an eye toward tax savings.  These programs can help you determine what types of loans or debt have tax advantages.  Before you commit yourself to a particular course of action, decide what you feel are your best three or four options.  After you’ve done that, enter each scenario into the tax preparation software and it will tell you what tax benefits, if any, you receive by progressing that way.  You may have to run through several scenarios and borrow something from one and another until you come up with an optimal plan for reducing your debt and saving on your taxes simultaneously.  This plan, however, will offer you the best of both worlds and result in more savings on your debt than you initially considered possible.


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