Debt itself is not tax deductible — you can’t subtract what you borrowed from your taxable income, because a loan is money you have to pay back rather than money you earned. What the tax code does allow, in specific situations, is a deduction for the interest you pay on certain kinds of debt. Mortgage interest, student loan interest, and business borrowing costs are the main categories that qualify. Credit card interest, auto loan interest on a personal car, and personal loan interest do not.
The rules that decide whether your interest qualifies turn on what the loan was used for, how much you borrowed, your income, and — for mortgage interest — whether it’s worth itemizing at all.
Mortgage Interest
Interest on a loan secured by your primary home or a second home is deductible up to a cap. For mortgages taken out after December 15, 2017, you can deduct interest on the first $750,000 of mortgage debt if you file jointly, or $375,000 if you file separately or as a single taxpayer.1Office of the Law Revision Counsel. 26 USC 163 – Interest Older mortgages originated on or before that date follow higher grandfathered limits of $1,000,000 and $500,000, and keep that treatment as long as they aren’t refinanced into a larger balance.
The loan has to have been used to buy, build, or substantially improve the home that secures it. This is where home equity borrowing gets tricky. Borrow against your equity to renovate a kitchen and the interest qualifies. Use the same home equity loan to pay off credit cards or fund a vacation and the interest is not deductible, even though your house is the collateral.2Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction The IRS looks at what the money was actually spent on.
You Have to Itemize
Here’s the catch that trips up a lot of homeowners. You can only claim mortgage interest if you itemize on Schedule A, and itemizing only pays off when your total itemized deductions exceed the standard deduction. For the 2026 tax year, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
Those are high bars. A married couple with a $300,000 mortgage at 6.5% pays roughly $19,000 a year in interest, which is well below the $32,200 standard deduction on its own. You would need meaningful additional itemizable expenses — state and local taxes, charitable donations, medical costs — to push past the threshold. Congress raised the state and local tax (SALT) deduction cap to $40,400 for most filers in 2026, which helps taxpayers in high-tax areas. Still, plenty of homeowners with moderate mortgages come out ahead taking the standard deduction. Run the numbers both ways before assuming your mortgage saves you anything at tax time.
Student Loan Interest
Student loan interest gets a separate, simpler deduction. You can subtract up to $2,500 of student loan interest from your income each year, and you don’t have to itemize to claim it.4Office of the Law Revision Counsel. 26 USC 221 – Interest on Education Loans It’s taken as an adjustment to gross income on Schedule 1, so it reduces your taxable income whether you itemize or take the standard deduction.
Income limits shrink and then eliminate the benefit. For the 2026 tax year, the deduction begins to phase out when your modified adjusted gross income exceeds $85,000 as a single filer or $175,000 for married couples filing jointly. It disappears completely at $100,000 for single filers and $205,000 for joint filers.5Internal Revenue Service. Revenue Procedure 2025-32, Tax Year 2026 Inflation Adjustments If you file as married filing separately, you can’t claim it at all. Same if someone else claims you as a dependent, which is common for recent graduates whose parents still list them.6Internal Revenue Service. Topic No. 456, Student Loan Interest Deduction
The loan has to have been taken out solely to pay for qualified higher education expenses (tuition, room and board, books, fees) for you, your spouse, or a dependent. Federal and private loans both qualify as long as the proceeds went toward education costs. Loans from a relative or from an employer-sponsored plan don’t.
Business and Investment Interest
Interest on money borrowed for business purposes is generally deductible as an ordinary business expense. That covers lines of credit, equipment financing, commercial real estate loans, and similar borrowing that supports operations. The deduction runs through the business return — Schedule C for sole proprietors, Form 1065 for partnerships — rather than Schedule A.
Larger businesses face an additional cap. The business interest limitation restricts the annual deduction to 30% of adjusted taxable income plus certain other amounts. Small businesses are exempt if their average annual gross receipts over the prior three years fall below an inflation-adjusted threshold, which was $31 million for 2025 with a similar figure expected for 2026.7Internal Revenue Service. Instructions for Form 8990 Most sole proprietors and small partnerships never hit this ceiling.
Investment interest — the cost of borrowing to buy taxable investments like stocks or bonds — has its own rule. Your deduction for investment interest in any year cannot exceed your net investment income for that year.1Office of the Law Revision Counsel. 26 USC 163 – Interest Pay $8,000 in margin interest but earn only $5,000 in investment income, and you deduct $5,000 now and carry the remaining $3,000 forward. The carryforward doesn’t expire. You cannot, however, use investment borrowing costs to offset salary or other non-investment income.
Interest That Isn’t Deductible
Most consumer debt carries no tax benefit at all. Interest on credit cards used for personal spending, auto loans for a personal vehicle, and personal loans or signature lines of credit are classified as personal interest, and the tax code does not allow any deduction for them.8Internal Revenue Service. Topic No. 505, Interest Expense The rate doesn’t matter. The total paid over the life of the loan doesn’t matter.
This is the category where people most often wish for a deduction and don’t have one. A credit card at 24% costs dramatically more over time than a mortgage at 6%, yet only the mortgage interest reduces your tax bill.
When Forgiven Debt Becomes Taxable Income
The other side of the debt-and-taxes question catches many people by surprise. When a lender cancels or forgives a debt of $600 or more, they report it to the IRS on Form 1099-C, and the forgiven amount generally counts as taxable income to you.9Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not? That applies to credit card settlements, negotiated payoffs, and any situation where you pay less than what you owed.
Several exceptions exist. Debt discharged in a bankruptcy case is excluded from income. Debt forgiven while you are insolvent — meaning your total liabilities exceed the fair market value of your assets — can also be excluded, but only up to the amount by which you are insolvent.10Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness Qualified farm debt and certain real property business debt have their own exclusions. If you claim insolvency, you’ll need to complete Form 982 and keep documentation showing that your liabilities exceeded your assets at the time the debt was canceled.
Student loan forgiveness deserves particular attention in 2026. The American Rescue Plan temporarily made all forgiven student loan debt tax-free at the federal level, but that provision expired on January 1, 2026.11Federal Student Aid. How Will a Student Loan Payment Count Adjustment Affect My Taxes? Borrowers who receive income-driven repayment forgiveness in 2026 or later will owe federal income tax on the forgiven balance. Public Service Loan Forgiveness stays tax-free under a separate, permanent provision of the tax code. Discharges for total and permanent disability or death also remain non-taxable. For borrowers on income-driven plans nearing the 20- or 25-year forgiveness mark, though, the tax hit can be substantial: a $50,000 forgiven balance could add $10,000 or more to a tax bill depending on your bracket.