All interest paid on qualified residential mortgages that do not exceed $1 million (including points paid to obtain a mortgage), most home equity loans up to $100,000, and business debt is deductible. With certain limitations, you may also deduct interest on loans used for investment purposes. Interest expenses related to certain passive activities (trade or business in which you do not materially participate) may be deductible, as well. You are allowed to deduct these interest expenses as long as they are paid during the tax year on a valid debt.

Remember, you cannot deduct interest paid on credit cards or loans for consumer items, such as appliances and cars, nor can you deduct interest paid on a loan used to purchase tax-exempt securities.

Student Loan Interest

Up to $2,500 of interest paid on student loans may be deducted. Since this is an "above-the-line" deduction, even non-itemizing taxpayers benefit. The loans may be used for qualified higher education expenses, such as tuition, fees, room and board, and books.

If you are in a higher tax bracket, you may not be eligible for this deduction because of phaseout rules. To see if you qualify, click here.