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Definition: Debt is an obligation to repay borrowed money.

Debt can impact federal income taxes in a number of ways. Borrowers of debt may be deduct the interest paid on a loan. Lenders of debt usually need to report interest earned on a loan as income.

People sometimes owe the government for unpaid taxes. Tax debts can be paid off by setting up some sort of a payment arrangement.

Debt taken out against a principal residence can give rise to tax-deductible interest. The mortgage interest deduction is available for two types of debts. Interest on a mortgage used to buy, build, or substantially improve a primary residence is tax deductible up to $1 million of debt. Interest on other home equity mortgages is tax deductible up to $100,000 of debt. Similarly, debt on rental properties generates tax-deductible interest against rental income.

Thus one tax strategy is to consolidate non-deductible debts into a tax deductible home equity loan.

Student loan debt can give rise to tax deductible interest. The student loan interest deduction is available for up to $2,500. The deduction is limited to taxpayers with incomes under under $70,000 or under $145,000 for married persons filing a joint tax return.

Debt incurred in a trade or business also gives rise to tax deductible interest. The loan proceeds must be used for business expenses.

Margin loans taken out against investments can generate a deduction for investment interest expenses.

Debt that is canceled or forgiven by a lender is considered income to the borrower. Canceled debts are usually taxable income, but canceled mortgage debt could be non-taxable.

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