Types

• The IRS allows tax deductions for mortgage interest, investment interest and student loan interest.
  
  

Function

• At the end of each calendar year, you will receive a form from your lender telling you how much interest you paid on your account. If you have a mortgage, you will receive a form 1098 from your lender.
  
  

Time Frame

• The interest must be deducted in the year it is due. If you prepay interest, you cannot write it off early.
  
  

Considerations

• Both the mortgage interest and investment interest deductions are itemized deductions, which means you must forgo the standard deduction to claim them.
  
  

Effects

• Because of the tax deduction for the interest on tax-favored debt, the actual cost of the loan is lower than it would be without special tax treatment.