Itemized Deduction for Interest Expenses

You may pay interest on a variety of loans or debts; some interest may be deductible while other interest is a nondeductible personal expense. There are three types of deductible expenses that can be claimed as itemized deductions reported on Schedule A:

• Home mortgage interest on your personal residence or a second home. Mortgage insurance is included in this category.
• Points to obtain a mortgage.
• Investment interest.

Each of these allowable deductions is subject to limitation:

• Home mortgage interest and points are subject to the overall reduction of itemized deductions for "high-income" taxpayers. Mortgage insurance is deductible only if adjusted gross income (AGI) does not exceed a set amount; if AGI is higher, the deduction phases out.
• Investment interest is deductible only to the extent of net investment income. Investment interest in excess of this income can be carried forward and used in future years.

Business interest, such as interest on a loan to buy the assets of a business, is fully deductible from business income. Interest on student loans is deductible, within limits, as an above-the-line deduction from gross income. These deductions are not dependent on whether you itemize your personal deductions.