How do we know? Because, under many circumstances, it lets you deduct the interest you pay on college loans or a mortgage. Since these deductions can lower your taxable income, they have the effect of reducing the income tax you'd otherwise have to pay.

Here are five kinds of payments that may count as interest deductions when you file your tax return:

1. Interest paid on higher education loans

Did you borrow to pay for higher education and attend school on at least a half-time basis? You may be able to deduct your interest payments on your student loans if you're not claimed as a dependent on someone else's tax return.

You can deduct up to $2,500 in annual interest payments, subject to income limits. You don't have to file an itemized tax return to claim the deduction. That means you can deduct student loan interest you've paid even if you don't have enough other deductions, in total, to file an itemized return.

Also, because this deduction is from your adjusted gross income, it may help you qualify for a lower tax rate or other important tax benefits.

2. Interest paid on home loans and home equity loans

Everyone knows home mortgage interest is tax deductible. But did you know there's a limit to it?

Interest payments are deductible on up to $1 million in home loans for married taxpayers filing jointly and $500,000 if married filing separately. If your mortgage is more than $1 million, you can't deduct the interest payments on the portion of the loan in excess of $1 million unless the mortgage was issued prior to October 14, 1987.

You can also deduct interest payments on a home equity loan of $100,000 or less ($50,000 if married filing separately).

Once again, if your home equity loan is more than $100,000, you cannot deduct the interest payments on the debt service for the portion of the loan above $100,000 unless the loan was issued prior to October 14, 1987.

3. Premiums paid on private mortgage insurance

For 2007 through 2010 only, premiums paid or accrued for qualified mortgage insurance acquired after 2006 are treated as deductible mortgage interest. Qualified mortgage insurance means mortgage insurance provided by the VA, FHA and Rural Housing Authority as well as private mortgage insurance, or PMI. (Generally, PMI is required of home buyers whose down payment is less than 20% of the home's price.)

PMI premium payments attributable to and made in 2007 can be included as a home loan interest deduction in 2007 tax returns only. However, just as with student loans, the deduction is subject to an income phase-out. The amount of the deduction is partially phased out if your adjusted gross income (AGI) exceeds $100,000 ($50,000 if married filing separately) and completely phased out if your AGI is more than $109,000 ($54,500 if married filing separately). (Source: IRS Publication 936.)

4. Penalties for paying off a mortgage early

If you paid a penalty for prepaying your mortgage, you can deduct that cost as interest on a home loan, too. (Some homeowners encounter this cost when converting from an adjustable-rate to a fixed-rate mortgage). Penalties for late payments on home loans can also be deducted as interest costs, provided the cost was not for an additional service provided by the lender.

5. Points paid when a mortgage is originated or refinanced

When you're buying or building a home, generally the points can be deducted in the first year of the loan. (Buyers pay points when a mortgage is originated to get a lower interest rate. One point is equal to 1% of the total loan amount.) However, if you paid points when refinancing your residence, the rules change. These points must be deducted over the life of the loan.

Example: Patricia refinanced her mortgage, obtaining a new 30-year loan. She paid $1,000 in points in the process. As a result, she can deduct $33 per year for the points she paid ($1,000 ÷ 30 = $33.33).