Schedule A

• Interest is money that you pay for the privilege a loan, whether for a home, car, boat or other purchases. To deduct interest expenses, you must (with a few exceptions, such as student loans) itemize deductions. That means listing the deduction, figuring the amount, adding the deductions and entering the total on your federal income tax form. The form for deducting interest and other expenses is Schedule A, which must be attached to the familiar Form 1040.
  
  

Deductible Interest

• Several types of interest can be listed on Schedule A. You can deduct interest paid on a home mortgage, if the home that is secured by the loan is your primary residence or second home. Likewise, you can deduct investment interest, meaning interest you paid to borrow money for an investment.
  
  

Personal Interest

• Personal interest is paid on money you borrow to purchase an item for personal use. This includes money paid, for example, for a car loan as well as interest paid on credit card debt. This form of consumer interest was fully deductible on taxes some years ago, but the Tax Reform Act of 1986 phased out the credit-card interest deduction.
  
  

Interest on Home Equity Loans

• Interest charged on home equity lines of credit is deductible, up to a loan amount of $100,000, no matter how you use the money. Some of these credit lines can be directly accessed using a card issued by the lending institution. Although this interest is generally deductible, you can only deduct interest for loans up to the fair market value of the home. Interest on loans that exceed the home's value is not deductible.
  
  

Business Interest

• Interest on money used to pay for business expenses is deductible, even if you borrow the money on a credit card. The same is true of interest on mortgages taken out for business purposes. These interest expenses are reported on Form 1040 Schedule C, lines 16a and 16b. You must be careful to separate business expenses from the cost of goods sold (which may include an interest expense). The cost of goods figures into net profit and is not deductible as a business expense. Money used both for personal and business expenses must be separately allocated, as only interest on the business expense is deductible.
  
  

Rolling Over Interest on a Refinanced Mortgage

• Credit card interest that has accumulated over time can sometimes be paid off with a refinanced or second mortgage, in which case the interest on the new line of credit becomes tax-deductible. However, any points that you pay on a second mortgage are not deductible in the year you take out the new loan -- that cost must be spread over the life of the loan and only the portion that you pay in the current year is deductible.