Not all interest an individual pays is deductible. With careful planning, however, you can help your clients free up some of their interest expense—and maximize the tax-efficiency of their investments. Here are a few things to consider.
Look to taxable investments.
Current tax rules allow individuals to deduct any interest associated with a loan—if they use the loan proceeds to purchase a taxable investment. So, before your client uses loan proceeds to buy tax-exempt bonds or move cash into their 401(k), make sure they consider taxable securities first.
Separate loan proceeds from other dollars.
For an individual to be able to deduct the loan interest, the loan proceeds must be traced to the purchase of a taxable investment. Best practice calls for opening a separate account for loan proceeds. This allows the client to explicitly show where those dollars went, making the interest deductible.
Be strategic.
The bottom line: When advising your clients, it’s important to consider all sources of funds. With careful planning and thought, your clients can be creative on the dollars they use to make certain interest expenses deductible.
Partner with a tax expert.
The ins and outs of investment interest are complicated, to say the least. At Elevate, we partner with you to advise your clients on these matters and more. If you’re ready to add more value to your client relationships, contact us today.