|
What is Consumer Debt?
A loan taken by an individual to meet his / her own personal, family or household requirements is called a Consumer Debt. Consumer Credit Counseling Services (CCCS) observes that inclination towards availing Consumer Loans is extremely high. CCCS states that there are an increasing number of cases where people have fallen behind their payment schedules, over the last one-year. Consumer debt is not tax exempted. Hence, it is imperative to manage the consumer loans in an effective manner so that the net result is beneficial to the consumers in terms of tax calculation or there is a provision for tax exemptions on such debts.
What are common types of Consumer Debts?
Loans for purchasing cars, consumer durables, home, etc are the most common types of Consumer Debts. In all such cases, there is no provision for tax planning, which increases the pressure on the consumers for
debt
repayment. In order to avoid such discomfort one must declare that such loans have been utilized towards investments such as developing business or
purchasing a
home. This will enable the consumer availing the loan claim tax exemption on the interests paid.
In case the loan is utilized towards any investment, then the interest payable is exempted from tax up to the amount of the net income on the investment. Such investments options can be classified as dividends, interests, rents, royalties and short-term capital gains. If long-term capital gains are taxed at the same rate as personal income then it can also be classified as an investment. Extra interest, if any, will be carried forward, enabling deduction of taxable income of the consumer. But if the loan has been fully utilized in consumer's business development then he can claim complete tax exemption on his income.
Since all the consumers are not businessperson or entrepreneurs, they are still in the dilemma of the interest being taxed. But there are provisions whereby the interest can be made tax-free, as mentioned below:
- It will be wise not to go for loans straightaway. In fact, make a purchase with the funds in hand and transfer the loan amount into the savings account. This will help, as the interest from the savings account will be tax exempted since the savings accounts are considered a sort of investment.
- The other option could be to sell old stocks and use the money for the new purchase. This will result in interest being tax exempted as the loan has been used to replace the old stocks.
- Another possibility is to purchase with the money allotted for the consumer's IRA and then replenish the money to the IRA fund by applying for a loan thus making the interest tax deductible.
An individual availing a loan secured by a lien like mortgaging
personal property is eligible for tax exemption on interests paid. Complete deduction of tax on interests is available on mortgages for acquiring, constructing or improving the home. This facility is also available for other personal properties like a vacation home, given that the money is used only for the specified purpose. But remember that this benefit of tax exemption hold good on the first $1 million only. In case of amounts, more than $1 million one will have to pay the taxes on the interests accrued. In such cases, a consumer can apply for another home equity loan worth $100000 making the total loan amount equal to $1.1 million. This will qualify the consumer to claim tax deduction on interests. In case the loan is against home equity, then it is up to consumer's discretion as to where and how to spend the funds. If the loan amount is equal to the consumer's equity on home then he is eligible for tax exemption on interest payments for the loan. This amount is restricted to home's fair market value less the current mortgage in debt.
Therefore, it is better to avail a loan against home mortgage depending on
one's equity on the said property. It can then be changed into exempted home equity debt irrespective of the source of the loan.
Being casual with debts and their repayments can be tricky, so it is better to pay off the debts in time or else avoid availing loans altogether.
Other Useful
Links
Good and Bad Part Of Debts
Debt Arbitration And Negotiation
Debt Crisis
Debt Settlement
Debts Effect On Life
Consumer Debts As Tax Planning
Debt And Equity Financing
|
Servicing
people throughout the U.S. Exclusive hard to find lenders
specializing in unsecured personal loans and bad credit loans.