Interest Deductions

Interest is an amount of money one needs to 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 then able to itemize your tax deductions on your tax return. Interest can fall into six categories like investment interest home mortgage interest, trade or business interest, passive activity interest, student loan interest; or personal interest. How the funds were borrowed and how they were used will decide if the interest amount is tax deductible on the tax return. Trade or Business interest is normally fully tax deductible on your tax return.

If the interest is prepaid, it must be allocated over the tax years to which it applies. It can also be deducted on your tax return for each tax year only the interest that applies to that tax year. The types of interest one can deduct on your tax return on Schedule A of Form 1040 are investment interest, certain home mortgage interest, and points in some cases. Home mortgage interest is interest one pays on a loan secured by the main home or a second home of the person. The loan may be a mortgage to buy a home, a second mortgage, a home equity loan, or line of credit. The main home is where the person spends most of the time. It can be a house, cooperative apartment, condominium, mobile home or houseboat that has sleeping, cooking and toilet facilities.