Tax Tips: Use a home equity loan to pay off credit cards

Experts will tell you not to run up the balance on your credit cards because you will pay dearly when it comes time to calculate the interest. But the fact is that many consumers do have credit card debt that is carried over from month to month.

Here's a way to reduce your taxes and probably save some interest in the process. Use a home equity loan to pay off your credit cards. (But be sure to cut up the cards and not begin accumulating a balance again!)

There are two advantages to carrying your debt as a home equity loan: First, the interest on a mortgage or home equity loan is generally deductible on your taxes if you itemize, while the interest on a credit card is not deductible. So you'll get a small reduction in your taxes for the interest on that loan. Second, home equity loans generally have lower interest rates than credit cards, so you can save yourself some money.

There are limits to the amount of mortgage interest that is deductible, so check the rules before you do this. The deduction is also only available for your first or second home, so you won't be able to do this on other properties you might own. This tip also won't help you if you are affected by the Alternative Minimum Tax.

As with any tax tip, check the rules before you act.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.