The countdown for tax season has officially begun. While many of us are focused on well-known tax breaks, you may be surprised to learn that your debt may be able to save you money on your taxes. By using debt strategically, you can maximize tax deductible interest on certain types of debt, which can really add up.
The U.S. median household debt averages $76,000--most of which is tied up in big-ticket items like a home or car. The challenge, however, is in determining what debt qualifies and how to structure it for maximum tax savings. So where can you start?
Apply the concept of debt portfolio re-balancing: Consolidate high interest debt--credit cards, consumer loans--into your low rate mortgage or home equity loans.
In general, you can claim an itemized deduction for interest on up to $1 million in first mortgages and up to $100,000 worth of home-equity debt. By consolidating your high interest debt into your mortgage or home equity loans, you can make non-deductible interest deductible.
An added perk? You'll lower the interest rate you're paying on your debt and simplify your financial life by having to make only one payment to one lender rather than multiple payments to several different lenders.
With home equity and income on the rise nationwide, historically low mortgage rates, and an increase in banks' desire to lend, this option is becoming increasingly more viable for homeowners with equity.
Plan ahead: 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.
Use that extra money to buy your car or other large purchase with cash. Why? Interest on auto for personal use or personal loan debt is non-deductible. Instead, you'll have a higher amount of tax-deductible interest by financing more of your house.
Think business tax break: If you are a business owner, do not buy your child a new car on financing if your business car is paid off.
Buy yourself a new car on financing and give the paid-off car to your child or trade it in for something your child likes. When it comes tax time, you can take the business auto loan as a business tax deduction.
Another tip for business owners: Pay for your personal appliances, printers and other items in cash, and your business tools and supplies on interest-bearing credit cards.
The interest on these credit cards, which is usually non-deductible, becomes tax deductible when used to business supplies.
It's true--some of these strategies may not make a big difference on your 2012 taxes, but make smart moves now and you could be rewarded come next year. These tips are for general education. Consult with your tax advisors about your specific situation and how these tips can impact your situation.
Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.