Tax deductions are an easy option to reduce the amount of taxes – they reduce taxable income (and reduce the tax burden). For those with credit card debt, interest can be a significant expense throughout the year. Can you claim credit card interest on your taxes?
You cannot deduct personal credit card interest from taxes
The Tax Reform Act of 1986 eliminated interest on personal credit cards as a tax deductible cost. In other words, you cannot deduct interest accrued from your daily purchases from taxes. This includes interest paid on personal loans, furniture, medical expenses and more.
Exception for enterprises and self-employed
Interest on credit cards can be deducted as business expenses for companies, contractors and other self-employed people. For accounting purposes, it’s best to use a separate credit card for business expenses. You can easily calculate business interest paid by using your monthly credit card statement. Otherwise, if you use the credit card you used for personal and business purchases, you’ll have to separate your business expenses and then calculate the amount of interest paid for the business.
You can deduct credit card interest paid for business expenses, even if the credit card is not a specific business credit card. For the purposes of keeping records, keep receipts and credit card statements specifying interest so that you have it in good time to file your tax return. Your taxpayer (even if you prepare your own taxes) will thank you for being so organized.
Types of interest that can be tax deductible
Although interest cannot be deducted from personal credit cards, there are other types of interest that you can deduct, according to William Perez, a US tax planning expert.
- mortgage interest
- interest on student loans
- interest on investment margins
To deduct this type of interest, you must pay interest on your mortgage or student loan – not the credit card you used to pay for it.
Although you cannot deduct interest on your credit card, you may be able to write off interest paid on business expenses charged to your card. This also includes the costs of doing business by contractors and self-employed persons.
You can still deduct this kind of interest, even if the credit card used is not a specific business card. Conversely, personal expenses associated with a business credit card are still considered non-deductible.
You can make it easier to use the tax by using a separate credit card for all business expenses. This simplifies the process of calculating interest paid. Track your receipts and the amount of interest paid throughout the year.
Combining business with pleasure and credit cards can make it difficult to understand the deductions. If you use the same credit card for both business and personal expenses, you can finish scanning the statement to separate business statements and calculate the amount of interest paid.