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Is Credit Card Interest Tax Deductible?

If you keep your personal and business credit cards separate, you might be in luck.

A pencil, calculator and coffee are placed around a green 1040 tax form.

Credit card interest, fees and penalties can pose major costs, especially if you're already in debt. With other financing tools, like mortgages or student loans, you may be able to deduct the interest and other fees you pay from your annual tax bill to reduce the burden. Credit cards are more restrictive when it comes to tax deductions, however.

Read more: Best Credit Cards for Paying Your Taxes

Can you deduct credit card interest?

The deductibility of credit card interest depends on the purpose of the underlying purchases. In a nutshell, you can deduct credit card interest for business expenses, but not for personal expenses. 

Self-employed individuals and independent contractors can deduct credit card interest on their trade or business expenses even if they don't have a separate business entity. Regardless, it's highly recommended to keep your personal and business expenses separate.

How to deduct credit card interest expenses

You can deduct credit card interest for business expenses if you carefully allocate the interest between business and personal expenses, regardless of the type of credit card you use. However, keeping separate personal and business credit cards -- and only using each for its intended purpose -- makes calculating deductible interest much easier. 

Once you calculate your total interest paid on business charges for the calendar year, you can deduct the interest on the relevant line of the trade or business's tax return. For independent contractors and others without a separate business entity, credit card interest goes on line 16b of Schedule C, which is filed with Form 1040. Partnerships report credit card interest on line 15 of Form 1065.

What types of interest are deductible?

Though credit card interest isn't tax deductible for individuals, you may be able to catch a break elsewhere. There are several different types of interest that are tax deductible, including:

  • Home loan interest: You can deduct interest from any home loans, including a primary mortgage, home equity loans and lines of credit.
  • Student loan interest: Student loan interest can be deducted, though personal loan interest cannot be.
  • Business interest: This applies to business loans and business credit card interest.

Whether the underlying loan is secured or unsecured doesn't affect the deductibility of the interest.

How to avoid credit card interest

Even when you can deduct credit card interest from your taxes, it's less expensive to avoid them altogether. To do so, you can pay off your credit card bill on time and in full every month. This proper financial hygiene will also help you build your credit score. Alternatively, you can take advantage of the best 0% introductory APR credit cards, which allow you to pay off purchases over a set period of time without incurring interest charges.

The bottom line

Interest paid on credit cards is tax deductible if it relates to trade or business transactions. For personal transactions, it is not deductible. Keeping separate personal and business credit cards makes calculating deductible interest much easier. You may be able to deduct your student loan interest or mortgage interest, however.

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