Definition
Personal Interest Expense: Any interest that is not attributable to home mortgage interest, investment interest, or business interest. Essentially, it is the interest on personal loans used for non-deductible purposes. As of 1990, personal interest expenses are no longer deductible for tax purposes.
Examples
- Credit Card Interest: The interest accrued on a credit card balance used for personal expenses such as dining out, clothing, and entertainment.
- Auto Loan Interest: Interest paid on loans for purchasing personal vehicles, unless the vehicle is used for business purposes.
- Personal Loans: Interest on loans taken out for personal purposes like vacation, wedding expenses, or any other non-investment and non-business-related purposes.
Frequently Asked Questions
1. Are personal interest expenses deductible?
No, personal interest expenses are not deductible. The tax deduction for personal interest expenses was eliminated starting in 1990.
2. Can I deduct interest on credit cards and personal loans?
Interest on credit cards and personal loans is not deductible if the expenses incurred are personal in nature and not related to business, investment, or home mortgage.
3. What types of interest are still deductible?
The types of interest that remain deductible include home mortgage interest, investment interest, and business interest.
4. If I use a personal loan for business purposes, is the interest deductible?
If the loan is used exclusively for business purposes, the interest may be deductible as business interest. It’s essential to maintain clear records to substantiate the use of the loan.
5. Has there been any legislative change after 1990 regarding the deductibility of personal interest expenses?
No significant legislative changes have reinstated the tax deduction for personal interest expenses since its elimination in 1990.
Related Terms
- Home Mortgage Interest: Interest on a loan secured by the primary or secondary residence that is used to acquire, construct, or substantially improve the home.
- Investment Interest: Interest paid on loans that are used for generating taxable investment income.
- Business Interest: Interest that is paid or accrued on debt funds used to operate a trade or business.
Online References
- IRS Publication 17: Your Federal Income Tax
- IRS Topic No. 505: Interest Expense
- IRS Publication 936: Home Mortgage Interest Deduction
Suggested Books for Further Studies
- J.K. Lasser’s Your Income Tax by J.K. Lasser Institute
- Federal Income Tax: Examples & Explanations by Joseph Bankman
- Taxes For Dummies by Eric Tyson
Fundamentals of Personal Interest Expense: Taxation Basics Quiz
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