Is Credit Card Interest Tax Deductible | A Personal Finance Guide
If you have credit card debt for whatever reason, you might be wondering is credit card interest tax deductible? The short answer is no. However, there are some circumstances, especially for freelancers, where credit card interest can be tax deductible.
Let’s explore this topic.
Is Credit Card Interest Tax Deductible? | A Quick Lesson
Banking rules, regulations and terms are confusing and not consumer friendly. For example, does the average person know the difference between ledger balance and current balance? Generally, any personal interest you may have accrued on a personal credit card is not deductible. That means if you use your credit card to make any personal purchases, the interest on that debt cannot be used as deductions. Here’s how the IRS defines interest and what is deductible.
Deductible interest types:
Qualified mortgage
Non-farm business interest
Farm business interest
Interest incurred to produce rents or royalties
Non-deductible interest types:
Interest paid on a loan to purchase a car for personal use.
Credit card and installment interest incurred for personal expenses.
What is Personal Interest?
Personal interest is credit card interest on personal purchases, or anything that is not business related. Pretty much anything you would normally buy. This interest is NOT tax deductible.
However, as noted above per the IRS, the exception is that any business purchases you make on a credit card that incur interest can be tax deductible.
My recommendation is that if you’re going to be making business purchases on a credit card, you should have a separate business credit card exclusively for business. This will make organization MUCH easier, and you will have less work to do come tax time.
What is a Business Purchase?
A business purchase is anything you purchase that helps you in the normal course of operating your business. You might be thinking “But wait! I don’t have a business”. Don’t worry, because being a freelancer technically means you have a business in the IRS’s perspective.
In fact, freelancers have to file their taxes as if they own a business on Schedule C. For example, if you drive for Uber and make an income–you have to file your taxes using the 1099 forms Uber sends you and summarize your income and expenses on the Schedule C for “business income and expenses”.
Anything you purchase for the operation of your “business”, like amenities for your passengers is a write off and tax deductible. In addition, if you make that purchase on a credit card and it accrues interest, that interest is considered business interest and is also tax deductible.
What is Business Interest?
Business interest is credit card interest incurred from a purchase that helps you operate your business.
So, to summarize, if you use a credit card to make a business purchase and accrue interest on that purchase, that interest is tax deductible. However, we don’t recommend accruing interest on business expenses. The entirety of your business purchase is already tax deductible, and it’s better to not accrue credit card interest as the rates tend to be very high for credit cards. Let’s look at an example:
If you are a freelance photographer and you purchased a new lens for $300–that entire amount is already tax deductible because it’s a legitimate business purchase for your photography business. If you use a business credit card to finance the $300 and you accrue interest, that interest is also tax deductible, but unless you really need the financing, using credit cards to finance purchases is not a smart financial decision, even if the interest is deductible. This is because credit card interest rates are incredibly high, usually greater than 10%, many greater than 20%.
Do I Need a Business Credit Card to Deduct Interest?
Technically no–you don’t need to be using a “business” credit card to expense either the purchase itself, or the interest that accrues from the purchase. However, if you are using your personal credit card to make business purchases, things could get murky very quickly. You would need to have accurate records and be able to separate every transaction, or even partial transactions, between business and personal.
You want to make the process as easy as possible when it comes time to file your taxes to avoid headaches and mistakes. We don’t recommend making business purchases on your personal credit card frequently.
How to Minimize Interest on Credit Cards
Because credit card interest rates are so high, it’s generally not recommended by experts to use credit cards as your primary financing means. In fact, before considering credit cards, you should consider just taking out a traditional loan, an SBA loan, getting investors, etc.
However, if you have no choice we have some tips to minimize credit card interest:
Do a Balance Transfer to 0% APR Card–credit card issuers will often have promotions to encourage new users to get their card by offering a 0% APR introductory period. If you can get approved for a 0% APR card, you can pay a fee to transfer your balance from another credit card in order to delay interest charges on your existing balance. The important part is that you take advantage of the promotional period to pay off the debt during this time, otherwise it accomplishes nothing
Pay off Highest Interest Cards First–if you have multiple credit cards accruing interest, pay off the one with the highest interest rate first, which can save you more money in the long run
Make More Frequent Payments–credit card companies calculate interest based on a daily balance, so if you wait until the end of the month to pay, you’re carrying a balance that accrues interest everyday
Credit Card Interest | In Summary
Personal interest on credit cards is not tax deductible–this is probably most purchases
Business interest on credit cards IS tax deductible–purchases that are ordinary for business operation
Credit card interest rates are very high, so It’s better to not accrue interest in the first place, than to pay interest just because it’s tax deductible.
FAQs:
When is credit card interest tax deductible?
Per the IRS, credit card interest on personal purchases are not tax deductible. However, credit card interest incurred from business purchases may be tax deductible.
When was credit card interest tax deductible on income tax?
The last time credit card interest was tax deductible on personal purchases was prior to 1986. The Tax Reform Act of 1986 eliminated the ability to deduct credit card interest on personal purchases. Instead, only credit card interest incurred for business purchases are tax deductible now.
