Is credit card interest tax deductible?

Is credit card interest tax deductible?

Is credit card interest tax deductible?

Nearly half of Americans who have credit cards (47 percent) don’t pay off their balance in full each month, NerdWallet’s 2019 Consumer Credit Card Report found. Similarly, a recent survey by real estate data company Clever also found that 47 percent of credit card users carry a balance from month to month.

Anyone who has carried a credit card balance knows that credit card companies charge interest when users don't pay off their full balance each month. These fees can be substantial, depending on a card’s interest rate; the average credit card interest rate recently hit 17.35 percent, according to CreditCards.com’s weekly rate tracker.

Wondering whether credit card interest is tax-deductible? Here’s what you need to know.

Most credit card interest is not tax-deductible

For consumer debt, “credit card interest is considered personal interest by the IRS and has not been tax-deductible since the 1980s,” lamented Lisa Greene-Lewis, CPA and tax expert at TurboTax. For that matter, “installment interest for any personal expenses [is] not tax-deductible,” Greene-Lewis added.

5 REASONS TO FILE YOUR TAXES EARLY

Baby boomers may remember that consumers used to be able to deduct credit card interest on their tax returns. That changed, though, when the federal government passed the Tax Reform Act of 1986, which eliminated personal credit card interest as a deductible expense.

Business credit card interest is deductible

Self-employed workers can deduct their business credit card interest as a business expense, on their Schedule C, to reduce their taxable income, Greene-Lewis said. (Farmers can claim it on their Schedule F form.

) In addition, “gig workers, shared-ride drivers, as well as those who sell items online or at local markets, can claim [credit card] interest on purchases for their business needs,” said Mark Steber, chief tax officer at Jackson Hewitt.

Steber recommended that self-employed workers have a credit card that’s strictly for business use and separate credit cards for personal purchases. “This makes it easy to track deductible credit card interest” and business-related purchases, he explained.

“Credit card fees, while not credit card interest, may also be deductible when the credit card is being used for business-related expenses,” Steber added.

HOW TO LOWER YOUR CREDIT CARD INTEREST RATE IN 5 EASY STEPS

What other types of interest are tax-deductible?

Greene-Lewis said tax filers should keep in mind that there are other forms of interest that are tax-deductible:

  • Student loan interest – Deductible up to $2,500 in interest payments.
  • Mortgage interest – Interest is deductible on up to $750,000 for loans taken out after December 15, 2017 (up to $1,000,000 for loans issued before December 16, 2017).
  • Home Equity Line of Credit (HELOC) interest – The caveat? HELOC interest is only deductible if the loan was secured by the homeowner’s mortgage and was used to buy, build, or improve their home, Greene-Lewis said.
  • Mortgage points paid to secure the home loan – One mortgage point typically costs 1 percent of the loan amount. For example, 1 point on a $300,000 mortgage would equal $3,000.
  • Interest for money borrowed for property held as an investment – For instance, interest payments for a loan of a rental property may qualify.

Smart ways to pay less in credit card interest

Credit card users who are carrying a balance from month-to-month can save money by implementing one of these strategies:

  • Ask for a lower interest rate – Credit card companies may be willing to reduce a customer’s interest rate if the person’s income has increased or their credit score has improved since they first opened their account.
  • Apply for a balance transfer card – Transferring high-interest credit card debt to a balance transfer credit card that offers a low or zero percent introductory rate is a smart move. Note, however, that most balance transfer credit cards charge an upfront balance transfer fee of typically 3 percent to 5 percent of the transfer amount.
  • Consult a credit counselor – A credit-counseling agency may be able to negotiate lower interest rates and payments.

Источник: https://www.foxbusiness.com/money/credit-card-interest-tax-deductible

Is Credit Card Interest Tax Deductible?

Is credit card interest tax deductible?

A lot of self-employed workers or small business owners ask if credit card interest tax deductible? Well, yes and no. Let me explain. Interest paid on a credit card for personal expenses cannot be claimed as a tax deduction.  In other words, any time a credit card is used solely for business purposes, the interest is tax deductible.  

Surprisingly, there was a time that a taxpayer could deduct credit card interest on their tax returns no matter what purposes the credit card was used.

 All the interest you paid were eligible to be deducted on your tax return.

 After the passing of the Tax Reform Act of 1086, interest paid to the credit card companies cannot be claimed on your income tax unless it was for business purchases.  

Business Expenses

What are business expenses then? Business expenses are the cost of carrying on a business. What expenses can you write off on your 1099 taxes then? To be deductible, a business expense must be both ordinary and necessary.

 An ordinary expense is one that is common and accepted in your business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Business Credit Card vs Personal Credit Card

At many times, I’m asked by my clients, “do I have to have a dedicated business credit card in order to deduct business-related credit card interest?”.  The answer is “No”.  You don’t need to have one but having a separate business credit card looks much better when it comes to the IRS audit.  

If you are a small business owner, we recommend you get a business credit card. Most do not have an annual fee and you can find various ones that fits your credit score. The annual fee, foreign transaction fees, ATM fees, maintenance fees and many other bank and credit card fees are also tax deductible.

Home Mortgage Interest

Generally, home mortgage interest is any interest charges you pay on a loan secured by your home (main home or a second home). You can deduct home mortgage interest or business loan if all the following conditions are met.

  • You file Form 1040 or 1040-SR and itemize deductions on Schedule A
  • The mortgage is a secured debt on a qualified home in which you have an ownership interest
  • Both you and the lender must intend that the loan be repaid.

You can deduct all of your home mortgage interest on the first $750,000 of indebtedness. Mortgage interest is reported to you on Form 1098, Mortgage interest Statement by the lender to which you made the payments.  

Student Loan Interest

Student loan interest is portion of added fees you paid during the year on a qualified student loan.  It includes both required and voluntarily pre-paid interest payments.

 You may claim them as a tax deduction if the lesser of $2,500 or the amount of student loan interest you actually paid during the year.

 The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.

You claim this deduction as an adjustment to income, so you don't need to itemize your deductions.

You can claim the deduction if all of the following apply:

  • You paid interest on a qualified student loan in tax year 2020;
  • You're legally obligated to pay interest on a qualified student loan;
  • Your filing status isn't married filing separately;
  • Your MAGI is less than a specified amount which is set annually; and
  • You or your spouse, if filing jointly, can't be claimed as dependents on someone else's return.

A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan;
  • For education provided during an academic period for an eligible student; and
  • Paid or incurred within a reasonable period of time before or after you took out the loan.

This deduction is phased out for taxpayers with adjusted gross income for $70,000 to $85,000 ($14,000 to $170,000 for married filing jointly). If you paid $600 or more of interest on a qualified student loan during the year, you will receive a Form 1098-E, Student Loan interest Statement, from the entity to which you paid the student loan interest.    

Investment Interest

If you itemize your deductions, you may be eligible to claim a deduction for your investment interest expenses.  Investment interest expense is the interest paid on money borrowed to purchase taxable investments.

 This includes loans for buying stock in your brokerage account.

In these cases, you may be able to deduct the interest on the margin loan (but this wouldn’t apply when you used the loan to buy tax-advantaged investments such as municipal bonds).  

If your expenses are less than your net investment income, the entire investment interest expense can be deductible. If the interest expenses are more than the net investment income, you can deduct the expenses only up to the net investment income. Any leftover interest expenses are carried forward to next year.

The IRS Form 4952 is used to determine the amount of deductible investment interest expense as well as interest expense that can be carried forward.

1)   Interest paid on an auto loan when the vehicle is for personal use

You cannot deduct the loan interest on a personal car but you can for a business car when actual vehicle expense deduction is used vs standard mileage rate deduction (or tracking mileage for taxes).  Actual vehicle expenses include:

  • Auto loan interest
  • Auto insurance
  • Gasoline
  • Auto maintenance
  • Tolls and parking fees

2)   Personal loan interest

Interest paid on personal loans is not tax deductible. However, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.

It’s not unusual that business owners mix up personal and business expenses together, and it’s not an easy process to separate them once all expenses have already piled up when the tax season comes.  If you would to lower your taxable income, however, it’s highly recommended not to commingle personal and business expenses and keep good records during the year.  

Note: at Keeper Tax, we're on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please reach out via email if you have questions.

Источник: https://www.keepertax.com/posts/is-credit-card-interest-tax-deductible

The big reason why most credit card interest isn't tax-deductible

Most of the time, credit card interest isn't eligible for a tax deduction. The reason is simple: The tax laws don't usually grant a deduction for debt that's incurred for personal reasons. Because most people use their credit cards for their personal use, any interest charges they incur therefore typically don't qualify for a tax deduction.

It's true that mortgage interest and loans are both types of personal debt.

Most people borrow to purchase their primary residences and use those homes exclusively for personal purposes rather than for a business, and schooling is inherently personal.

But that's what makes those deductions two of the biggest exceptions to the general rule, offering tax breaks that are worth hundreds of billions of dollars in total for American taxpayers.

Nearly every other type of personal debt you can think of gets no such favorable treatment. Auto loans, payday loans, and bank personal loans aren't tax-deductible, and even home equity lines of credit have seen their rules change recently. As a result, you generally won't be able to deduct any interest you pay on your credit cards.

Business credit card charges and deductible interest

However, the issue of credit card deductibility isn't quite as easy to address as with a simple “no.” There are situations in which you can deduct credit card interest: if the spending relates to a legitimate business expense.

The most common example of how this plays out in real life is for entrepreneurs. If you're self-employed, then you'll typically have plenty of expenses to pay on behalf of your business.

Those who pay for those expenses using a credit card and then subsequently have to pay finance charges on their outstanding card balances have incurred a business interest expense, and that's typically deductible against income from the business.

The same is true for small businesses that are set up as partnerships or limited liability companies.

The difference there, though, is that the business entity itself might be required to file a return, and if that's the case, coordinating the reduction in business income that gets passed through to you as a partner or LLC member and the numbers that you'll report on your individual tax return is crucial in order to avoid raising red flags.

However, it's important to understand that just because you have a business doesn't mean that you have a free hand to deduct any credit card interest at all.

The only expenses eligible for an interest deduction are those that are related to your trade or business activity.

That's why it's usually best to get a business credit card so that you can separate out clearly and distinctly your personal expenditures from your business purchases.

Don't make a costly mistake

The fact that credit card interest isn't usually tax-deductible is just one more reason why carrying a balance on your credit cards doesn't make sense in the first place.

Getting charged extremely high interest rates and not being able to deduct that interest on your tax return shows just how costly having an outstanding credit card balance can be — and why avoiding that costly mistake by paying your balance in full every month is the best way to handle your finances.

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Источник: https://www.fool.com/the-ascent/credit-cards/articles/is-credit-card-interest-tax-deductible/

Can you write off credit card interest?

If you drive for Uber, work as a freelance web designer, consult other businesses or even pet sit, and you charge business expenses to your credit card, any interest that accrues can be a write-off on your tax return.

An estimated 57 million workers, or 35% of the U.S. workforce, freelanced in 2019, according to a poll by Upwork and the Freelancers Union. Freelancing income totaled almost $1 trillion.

It’s best to get a separate credit card for your business expenses so “all interest on that card is deducted as a business expense” says April Walker, lead manager of tax practice and ethics at the Association of International Certified Professional Accountants.

But it’s not mandatory that you get a business credit card in order to deduct the interest you accrue. If you have a personal credit card you don’t use, you can set that aside for business expenses, Walker says.

If you mix both your business and personal expenses together on one card, you can still deduct the interest from your business expenses. But you’ll need to calculate what percentage of your purchases went toward your business, and then deduct that percentage of your credit card interest from your tax return, Schneidewind says.

“It can get messy trying to keep track of what’s what if you are mingling business and personal expenses” cautions Thomas Nitzsche, spokesman for Money Management International, a nonprofit consumer credit counseling service.

But if you have a steady gig or are self-employed and want to get a business credit card, you typically need to give a personal guarantee, says Emanuel Rivero, head of Money Management International’s small business counseling services.

However, if you have a business credit card and have a good payment record and your business grows, “it can open doors for funding that doesn’t require a personal guarantee,” he says.

A business card “can also offer some great reward and point programs for travel or cash back,” Rivero says.

Tip: Thinking of paying your taxes with a rewards credit card? It’ll qualify as a purchase, but the fees you’ll have to pay will most ly wipe out any value on those rewards.

HELOCs and home equity loans

Until recently, your home also could provide a way for you to deduct credit card interest and reduce the interest rate. As of Jan. 8, the average interest rate on a new credit card was 17.30% APR, according to CreditCards.com.

If you had a home-equity loan or home equity line of credit (HELOC), you could ring up charges to your credit card, then pay the card off using the HELOC or home equity loan. Home equity loans generally carry much lower interest rates than credit cards.

Interest on HELOCs and home equity loans had been tax-deductible, regardless of what the home equity loans were used for, says Lisa Greene-Lewis, a CPA and tax expert at TurboTax.

But Congress changed those regulations in the Tax Cuts and Jobs Act of 2017. With tax reform, “interest has to be related to the building or improving of your principal residence,” before you can write it off, Greene-Lewis says. The change took effect starting in the 2018 tax year.

Paying your credit card debt with a home-equity loan can still reduce your interest rate. As of Feb. 13, the average home equity loan rate was 7.12% APR, according to Bankrate.com.

But you may end up paying that interest for a longer period of time, and that could wind up costing you more than if you hadn’t transferred the debt to a home-equity loan, Nitzsche cautions.

Mortgages

Homeowners can continue to deduct the interest paid on their mortgages. Under the 2017 tax law, if you bought a house after Dec. 15, 2017, you can deduct the interest on the first $750,000 of your mortgage, Greene-Lewis says. If you purchased a home prior to that date, you can deduct mortgage interest on the first $1 million of your mortgage.

Student loans

You can also deduct up to $2,500 in student loan interest. You can deduct the full amount if you earned less than $70,000 as a single filer, and a reduced amount if you earned up to $85,000 last year. For married taxpayers, you could take the full deduction if you earned less than $140,000, and a reduced deduction if you earned up to $170,000.

See related: It’s U.S. Census time again. Here’s how to avoid getting scammed

How to reduce your credit card interest in 2020

There are ways you can reduce your credit card interest this year, including transferring a balance to a card with a 0% promotional APR.

“The hardest part is being able to qualify,” said Greenpath credit counselor Jeff Arevalo, because you usually need to have a solid credit score.

With a balance transfer, you transfer your credit card balances from a card with a higher interest rate to one with a 0% APR for a set period of time, such as 12 or 15 months.

But you’ll most ly have to pay a balance transfer fee, which is generally 3% to 5% of the balance transferred. And if you don’t pay the balance off within the set period of time, the interest rate will climb. The average minimum APR for balance transfer cards is 15.45% as of Feb. 12, 2020, according to the CreditCards.com Weekly Credit Card Rate Report.

You need to be sure “your budget is healthy enough to pay down the debt within the introductory period,” Arevalo says.

Applying for a new credit card also can affect your credit score, particularly if you apply for several cards within a short period of time, he says.

See related: Best balance transfer cards with no transfer fee

Another option to reduce interest is to take out an unsecured personal loan. If the personal loan limit is high enough, it could provide a way for you to roll all your credit card debt into one loan, which carries a fixed rate for a certain amount of time, Nitzsche says.

As of the third quarter of 2019, the average interest rate for a 24-month personal loan was 10.07%, according to the Federal Reserve.

But you need to be careful to not continue to use your credit cards, running up even more debt, Nitzsche says. Otherwise, you could wind up with both personal loan and credit card payments due.

Your debt also could balloon if you’re not careful.

“With personal loans, we often see clients who previously took out the loan to consolidate credit card debt but didn’t address their reliance on credit cards. They then end up with both credit card and loan payments,” Nitzsche says.

Correction: An earlier version of this story incorrectly identified Greenpath credit counselor Jeff Arevalo. 

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

Источник: https://www.creditcards.com/credit-card-news/is-credit-card-interest-tax-deductible/

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