Interest is usually charged on money you borrowed. There are certain situations where interest can be claimed either as a deduction or a credit. In order to deduct interest, you have to make sure it qualifies and see how you should deduct it.

Interest that you have prepaid need to be deducted throughout the tax year for which the interest applies, as you are only entitled to a deduction for that year. If you paid points on a primary residence, you may qualify for an exception.

Itemized interest deductions to be claimed on Form 1040, Schedule A include:

• Investment interest (limited to your net investment income)
• Qualified mortgage interest including points, provider you are the buyer

Other types of deductible interest include:

• Non-farming business interest
• Farm interest
• Interest incurred through rents or royalties

Student loan interest is typically taken as an adjustment to income when you file your tax return.

Any personal interest is not deductible. This can include:

• Interest on a personal car loan
• Credit card interest
• Points for sellers, investigation fees or service charges, or interest relating to tax exempt income

If you received a mortgage credit certificate issued from a state or local government, you may qualify to take a credit for mortgage interest. Qualified mortgage interest is any that is paid on a loan that is backed by your primary or secondary home. Your primary home is where you spend most of your time, and it is required to have adequate sleeping, cooking, and plumbing facilities.

A second home includes any residence you own. You are not required to live in the home at any point during the year. Although, if you use it as rental property, you must use it as a home for either 14 days or 10 of the days you rent it, whichever is greater, if you want the interest to qualify for a deduction.

Mortgage interest and points will be reported on a Form 1098, Mortgage Interest Statement, by your lender. You are able to deduct all of the interest on certain mortgages, including:

• A mortgage acquired prior to October 13, 1987
• A mortgage acquired after October 13, 1987 which is used to purchase or improve your home, generally referred to as home acquisition debt, and is less than $1 million or less. Couples who are married but file separately have a lime of $500,000.
• Home equity debt up to a total of $100,000, or $50,000 if married filing separately. Home equity debt is also limited by the fair market value reduced by the grandfathered debt and home acquisition debt.

You can claim mortgage interest as an itemized deduction, although you may be subject to certain phase outs applicable to itemized deductions.