With the explosion in home values over the past year, many taxpayers took advantage of the increased equity in their homes by acquiring home equity lines of credit (HELOC). These loans are often used to make large purchases, home upgrades, or even pay off other debts. If you took out one of these loans, you may be wondering, “Is interest on a HELOC tax deductible?” Good question, especially with tax season right around the corner. Here’s what you need to know about what qualifies, how much you can deduct, and how to take the deduction on your tax return.
Is The Interest on a HELOC Tax Deductible?
Yes and no. The interest on your HELOC may be tax deductible but it depends on how you used the money from the loan. Before the Tax Cuts and Jobs Act (TCJA) of 2017, you could deduct your HELOC interest regardless of what you spent the money on. Under the new law, tax deductions on HELOCs between 2018 and 2026 must meet certain guidelines to qualify.
Under current IRS guidelines, the interest on a HELOC can only be deducted if all of the following are true:
- The loan was for a qualified residence (your main or secondary home), and;
- The funds were used to buy, build, or substantially improve that residence.
If you used the loan to pay off credit card debt, take a vacation, or for any other expense unrelated to your qualified residence, the interest on your HELOC is not tax deductible.
How to Claim Your Home Equity Line of Credit Interest Deduction
For a HELOC made on or after December 16, 2017, you may claim the interest paid on up to $750,000 of the loan amount. This is true for all filing statuses except married filing separately, which is capped at $375,000.
HELOCs obtained before December 16, 2017, have a higher limitation – $1 million. If you’re married and file separately, it’s reduced to $500,000. It’s important to note that HELOCs created before TCJA but refinanced after it also qualify for the higher limit. Any additional debt over the original amount, however, is not eligible for the higher limit.
Claiming The Deduction on Your Tax Return
Claiming the interest deduction on your federal income tax return isn’t complicated, just follow these easy steps:
- Gather IRS Form 1098. Your lender should send you a Mortgage Interest Statement (Form 1098) before tax time. It will detail how much interest you paid on your HELOC during the previous year. If you don’t receive this by February, contact your lender to request a copy.
- Determine if your loan and expenses qualify. Depending on when you took out the loan, the amount financed, and how those funds were used, you may be able to deduct all or some of your interest.
- Calculate all itemized deductions. If you take the standard deduction, you won’t be able to deduct your HELOC interest. You can only claim it if you itemize your deductions. It’s worth the effort if your total deductible expenses exceed the standard deduction amount. For the 2022 tax year, the standard deduction for married couples filing jointly is $25,900. For single taxpayers and married individuals filing separately, it’s $12,950, and for heads of households, the standard deduction is $19,400.
If you itemize and take the HELOC interest deduction, save any documents that can substantiate your claim just in case you’re audited. This includes bank statements that show your HELOC payments and your loan’s closing disclosure document. You should also keep any receipts, invoices, or contracts for expenses related to buying, building, or improving your qualified residence.
It may be beneficial to speak with a tax professional to determine if itemizing or taking the standard deduction is best for you. They can help you maximize your deductions and credits, and minimize your tax liability. A tax specialist can also help you plan ahead for future tax years. To receive a free consultation, call Tax Defense Network at 855-476-6920 and speak with one of our tax experts today!