Is Credit Card Interest Tax Deductible? It Depends
Claiming tax deductions could be a good way to reduce your taxable income. Since some types of interest can be claimed as deductions for tax purposes, you may be wondering if you can deduct credit card interest on your taxes.
Deductions are items that reduce your taxable income, and the lower your income, the less tax you owe. They're different from tax credits, which are directly subtracted from the taxes you owe. Deductions that can be claimed include education expenses for dependents and business travel.
Credit card interest as a personal expense isn't tax deductible
The IRS doesn’t allow you to deduct credit card interest for personal expenses. However, that wasn’t always the case. Until Congress introduced the Tax Reform Act of 1986, credit card interest and other forms of personal interest were tax deductible. However, this was seen as encouraging people to spend money rather than save it. (According to a study, by 1991, eliminating the deduction had lowered credit card debt by about 14 percent.) Eliminating the deduction also boosted the government’s income.
Businesses can claim credit card interest deduction on taxes
While credit card interest for personal expenses isn't deductible, interest for business expenses is. Almost any business credit card fee or credit card charge (such as a finance charge, annual fee, monthly fee, or late fee) incurred by a business through a credit card is deductible. Businesses are also eligible to deduct the expenses they pay to accept credit cards as a merchant.
The catch here is that the debt must be related to a trade or business activity. Therefore, if you paid your personal expenses with a business credit card, they're not eligible for deduction, but if you paid for business expenses with your personal credit card, they are. That’s why it's better to keep business and personal expenses separate.
Which type of interest are tax deductible?
There are some forms of interest that the IRS allows individuals to deduct:
- Interest on student loans.
- Business loan interest.
- Interest on home loans.
- Interest on a loan to purchase an investment property.
All other interest is considered personal interest, including interest on credit cards, auto loans, unpaid bills, and the late payment or underpayment of federal, state, and local income taxes.