August 14th, 2014 7:46 AM by Jackie A. Graves, President
If you need funds to cover a purchase, pay
off debt or remodel your home, you have a few lending options—including the use
of home equity.
You could use your credit card to cover the
cost or take out a personal loan from the bank. You also can use the equity in
your home to open a home equity line of credit (HELOC) or get a home
All of these options will get you the funds
you need now, but only two have tax perks: both a home equity loan and a HELOC come with
But be forewarned––there are caps and
potential exclusions to these tax benefits.
Home Equity Options
With a home equity loan, you’ll receive one
lump sum and make fixed monthly payments. With a HELOC, you’ll have an
open-ended credit line you can draw from again and again as long as you’re
making payments—and your credit limit is not maxed out.
Both home equity loans and HELOCs can be used for any
need you have. Both also typically offer lower interest rates than a standard credit card.
Unlike other forms of borrowing, both home
equity loans and HELOCs have the added bonus of tax deductions, if you’ve paid
interest toward the loan.
“If you have $100,000 loan at 10% interest,
you would be paying about $830 every month in mortgage interest,” said David
Reischer, a business attorney and co-founder of LegalAdvice.com. “That
amount over the course of a fiscal year would be potentially deductible at
the end of the year when you file.”
But there is a cap to how much you can
deduct: the mortgage interest can only be deducted for a loan amount limit
up to $1,000,000. And if you choose to use the money for something other
than reinvesting into your home, you’ll face another limit.
“The interest is further capped at $100,000
for the proceeds of a loan that are not used for home improvement or other
housing expenses, but are used for some other purpose like credit card
consolidation, paying for education expenses or other non-housing related
expense,” Reischer said.
Tax deductions are often like a double-edged
sword. While many people are able to take the full deduction, other people may
end up taking a reduced amount.
For example, if you’re a high-income earner,
you may be subject to Alternative Minimum Tax, which Resicher notes may
affect whether you will still need to pay tax on mortgage interest.
Certain benefits–like an interest deduction
for a home equity loan or HELOC–can significantly reduce the amount of
taxes a person owes.
According to the Internal Revenue Service,
“the AMT sets a limit on those benefits. If the tax benefits would reduce total
tax below the AMT limit, the taxpayer must pay the higher Alternative Minimum Tax
Determining Your Tax Benefits
To make sure you’re filing correctly—and
getting the full deduction you’re allowed—gather your paperwork and consider
seeing a tax specialist.
You’ll need documentation
for your original mortgage as well as documentation for your loan.
You’ll also need a statement from your mortgage servicer that details the
amount of mortgage interest paid in the fiscal year, Resicher said, which are
typically issued annually by mail.
Lastly, to determine if you’re subject to the
AMT, you’ll also need proof of your income and assets.
By: Angela Colley | To view the original
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