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qualified student loan interest; qualified residence interest; investment interest; business interest; personal (consumer) interest

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The Tax Adviser

Publication Source

The Tax Adviser


Individual taxpayers are subject to different rules for deducting different types of interest expense. The five primary types of interest for individual taxpayers are student loan interest, qualified residence indebtedness interest, investment interest, business interest, and personal interest. The law known as the Tax Cuts and Jobs Act temporarily introduced new rules for years after 2017 for qualified residence indebtedness interest, investment interest, and business interest. For 2018 through 2025, the acquisition indebtedness limit on the qualified residence indebtedness deduction has been lowered to $750,000 for loans incurred after Dec. 15, 2017, and the separate deduction for home-equity indebtedness has been suspended. For years after 2017, investment expenses are no longer deducted in calculating net investment income for purposes of determining the deduction for investment interest. A business can deduct its business interest only to the extent of the sum of its business interest income, 30% of its adjusted taxable income, and its floor plan financing income. Business interest in excess of the limitation can be carried forward indefinitely. The business interest limitation does not apply to small taxpayers (those with average annual gross receipts of $25,000,000 or less for the three-year period ending with the prior tax year). When debt proceeds are used for more than one purpose, the interest on the debt must be allocated in the same manner as the debt proceeds are used.

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