Is Credit Card Interest Tax Deductible?
When tax time comes around, you're undoubtedly looking for ways to reduce the amount of tax you owe or increase the refund you'll receive. Credit card interest would be make a nice deductible expenses, especially if you paid hundreds of dollars in interest over the year. Unfortunately, many consumers will not be able to deduct the credit card interest they've paid.
No Deduction for Personal Credit Card Interest
If you were born in the 1960s or earlier, you might remember a time that you could deduct credit card interest on your tax return. It didn't matter what you'd purchased with your credit card, all the interest you paid could be deducted on your tax return.
The 1980s saw major changes to the tax code with the passing of The Tax Reform Act of 1986. One of those changes was the elimination of personal credit card interest as a deductible expense. You could no longer deduct interest you paid to the credit card companies for everyday credit card purchases. You can't even deduct credit card interest if you used the credit card for a purchase whose interest would be deductible if you used another debt instrument, like real estate, home improvements, or college tuition.
Personal interest extends beyond interest paid on credit cards. It also includes interest paid on auto loans and other unpaid bills.
Exception for Businesses and Self-Employed Individuals
Credit card interest may be deducted as a business expense for businesses, contractors, and other self-employed individuals. For accounting purposes, it's best to use a separate credit card for business expenses. You can easily calculate the business interest you've paid by using your monthly credit card billing statements. Otherwise, if you use a credit card that you've used for personal and business purchases, you'll have separate out your business expenses, then calculate the amount of interest you paid for business.
You can deduct credit card interest paid for business expenses even if the credit card is not specifically a business credit card. For record keeping purposes, file away your receipts and credit card statements detailing interest so you have them when it's time to file your tax return. Your tax preparer (even if you prepare your own taxes) will thank you for being so organized.
Types of Interest That Can Be Deducted
While personal credit card interest can't be deducted, there are other types of interest that you may be able to deduct, according to William Perez, U.S. Tax Planning Expert.
To deduct this type of interest, you must have paid the interest on a mortgage loan or student loan, not a credit card used for those expenses.
You could use a home equity loan to pay off your credit cards, then deduct the interest paid on your home equity loan. This could be benefit you in the long run, since home equity loans often have a lower interest rate. But, remember that your home is on the line if you default on the payments.
Consult with a tax professional about your tax situation to get specific advise about whether the interest you paid is tax deductible.