Debt Management Plans Require Consideration of Taxes

March 16, 2009 by  
Filed under Debt Handling

You know the old saying: death and taxes are the two sure things you’ll encounter in life, and the same is true when dealing with your debt. Too many try to focus on only paying or getting rid of their debts as quickly and easily as possible, without ever considering the tax implications of any option they may choose.

Some of these tax implications are beneficial, however. For instance, the interest paid on your home loan is tax deductible, which is quite a large percentage of your payment during the first few years of the loan. This deduction results in less tax owed each year, putting more of your money back in your own pocket.

However, this isn’t always the case with interest payments on debt. Usually, you want them to be as low as possible and eliminated sooner rather than later.

A home equity line of credit, or HELOC, is a common second mortgage that is used to finance remodels and improvements, additional purchases, or paying off credit card debt. These can be of great use, and provide the same tax deductions available on your first mortgage.

This can be of great benefit if you’re looking for a way to pay off old debts as well as reduce your taxable income. Interest rates are lower than credit cards or other unsecured loans, reducing your monthly outlay as well.

Loan calculators found on the Internet are also available to provide the tax calculations for you. You need to be aware of every cent your new line of credit will cost you in the long run, so compare these different vehicles before signing on the dotted line.

Large medical bills are another reason to seek additional credit. Using your trusty credit card is an extremely expensive way to pay these off. You may be able to pay the institution you owe directly at a lower interest rate than an additional loan with cost – some medical expenses and medical-related debts may also be tax deductible.

Student loans also carry the added advantage of tax deductions. When considering how you will finance your formal education, you should consult a tax professional to study these different options available. In some cases, you will be able to deduct interest paid on the loans; in others, you may be allowed to deduct the entire payment.

Financing any large purchase – a home, car, medical costs or even your education – should come only with careful consideration. Not only should this added debt be considered in your long-term debt management plan, but you’ll need to consider the regular and real costs to your bank account.

Interest rates and terms will vary between different types of loans and applicants, depending on the type of financing and the applicant’s history. Before taking the plunge, you need to ensure you can afford monthly payments, but should also account for possible tax reductions as a result of taking on the new debt.

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