Interest is an amount you pay for the use of borrowed money. To deduct interest you paid on a debt on your tax return, you must be legally liable for the debt and you must be able to itemize your tax deductions on your tax return. Interest-tax deductions fall into five major categories:

Home-mortgage interest. Home-mortgage interest is interest you pay on a loan secured by your main home and/or a second home. Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking, and toilet facilities. The loan may be a mortgage to buy your home, a second mortgage, a home-equity loan or a line of credit. Mortgage interest is reported to you on Form 1098, Mortgage Interest Statement by the lender to which you made the payments.

Points. In addition to the interest rate on a mortgage, lenders usually charge points. The points are paid up front at closing. Whether the charge is called a loan-origination fee or discount fee, they are deductible on your tax return if they are charged for the use of money. Points paid for a second home must be deducted over the life of the loan. Points paid solely to refinance your home mortgage cannot be deducted on your tax return in the tax year paid. Instead, they must be deducted on your tax return over the life of the loan. In other words, if you have a 30-year loan, and the points are $3,000, you can deduct $100 per year as interest expense on Form 1040, Schedule A. If you pay off the loan early, you may deduct all outstanding points (interest) in that year.

Investment interest. Investment interest, which is any interest incurred to buy or carry investment property, is tax-deductible on your tax return up to the amount of your net investment income. Margin-loan interest paid to purchase taxable stocks and bonds falls into this category. Any investment interest that is disallowed may be carried forward indefinitely and used in future years. When the investment is sold, any interest expense not previously deducted may be added to the cost basis of the asset. This will save you possible capital-gain taxes. You calculate your investment-interest deduction from IRS Form 4952, Investment Interest Expense Deduction.

Student-loan interest. This interest is partially tax-deductible on Form 1040, not on Schedule A. The maximum deduction is $2,500 and is based on filing status and income limits. The deduction is phased out for taxpayers with adjusted gross income of $70,000 to $85,000 (single filers) and $140,000 to $170,000 (married filing jointly). Please note that married-but-filing-separate tax returns are not eligible for this deduction. A qualified student loan is one that you took out solely to pay qualified education expenses for you, your spouse or a dependent.

If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form 1098-E, Student Loan Interest Statement, from the entity to which you paid the student-loan interest.

Business interest. Credit card interest is never deductible for individuals, but it's a different story when business is involved. Business interest, meaning interest paid on any loan take out for business purposes, is considered a legitimate business expense. Of course, you can't use your company credit card for personal expenses and then deduct the interest.

Caution: Personal interest, which includes interest paid on car loans, credit cards and personal loans, is not tax-deductible at all on your tax return.

Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or

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