Some types of interest payments are tax deductible. These include interest include you pay on a mortgage or home equity loan or to finance a student loan. Interest you pay on other types of debt such as a credit card or auto loan, however, is generally not tax deductible. That noted, there are different rules for credit card expenses depending on whether they’re made for personal or business purposes. Read on to learn more about the rules for deducting credit card interest on your taxes.
Read more: Best Credit Cards for Paying Your Taxes
Can you deduct credit card interest?
Whether or not you can deduct credit card interest depends on the transaction. In a nutshell, you can usually deduct credit card interest for a business expense but not a personal expense. To be eligible for a deduction, “the debt must be related to a trade or business activity,” according to Intuit.
As such, it’s a good practice to keep personal and business spending separate, with different cards dedicated to each. Ideally, you can make all of your business charges on one card that’s used only for business purposes, and leave all of your personal spending for a different card. Combining personal and business spending on one card will complicate your accounting, and make it more challenging to determine how much of an interest charge is legitimately deductible.
How to deduct credit card interest expenses
As with any specific question about your particular tax return, it’s best to consult a tax professional for guidance. That noted, there are general rules of thumb for taking a deduction on credit card interest. In most cases, you are eligible to deduct credit card interest associated with a business expense. And if you use a credit card exclusively for business purposes, it should be fairly simple to calculate how much interest you paid in a given tax year.
What types of interest are deductible?
Though you can’t deduct credit card interest on personal expenses, there are several different types of interest that are tax deductible. They include:
- Home loan interest: You can deduct interest from home loans including a primary mortgage, home equity loans and lines of credit.
- Student loan interest: Student loan interest can be deducted. Personal loan interest cannot be.
- Business interest: Interest paid on purchases related to business activity may be deductible. This could apply to loans and credit card interest.
How to avoid credit card interest
Though you may be able to deduct credit card interest from your taxes, the best financial strategy is to avoid interest altogether. To do so, pay off your credit card statement balance on time and in full every month. This will also help you build your credit score. Alternatively, you can take advantage of a 0% introductory APR credit card, which allows you to pay off purchases for a limited period of time without incurring interest charges.
The bottom line
Interest paid on credit cards is tax deductible only if it relates to business transactions. For personal transactions, it is not deductible. Keeping your personal and business charges on separate credit cards will make calculating deductible interest much easier.
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Correction, 7:30 a.m. PT Jan. 25: An earlier version of this article was not sufficiently clear in outlining the rules for tax deductions related to credit card interest. The article has been corrected to clarify that credit card interest related to business transactions may be tax deductible but credit card interest related to personal transactions is not. We’ve replaced phrases that were not entirely original.