Interest on Personal Expenses Is Not Tax Deductible
The 1980s saw major changes to the tax code with the passing of The Tax Reform Act of 1986. Among those changes was the elimination of personal credit-card interest as a deductible expense, which meant taxpayers could no longer deduct interest paid on balances. Because deductions for personal interest aren’t allowed, this means you can’t deduct interest you pay on credit cards, loans used for personal expenses, service charges, and interest related to tax-exempt income unrelated to business expenses. You can’t even deduct credit card interest if you used the credit card for a purchase whose interest that would otherwise be deductible if you used another debt instrument—like real estate, home improvements, or college tuition.
Exception for Businesses and the Self-Employed
If you’re a gig worker or have a business, you may be able to deduct credit card interest you’ve paid. Businesses, contractors, and other self-employed individuals are allowed to deduct credit card interest when they use the purchases for qualified business expenses. You must be fully liable for the credit card purchases, meaning the expenses must have been paid on your own credit card. Your monthly credit card billing statements for the previous tax year can serve as a reference for the amount of interest you’ve paid on business expenses. If you’ve used the same credit card for both personal and business purchase, you’ll have to separate out your business expenses, then calculate the amount of interest you paid only on your business purchases. The IRS doesn’t specify that a business credit card must be used so you can deduct credit card interest for business expenses even if they were made on a personal credit card. Again, you’ll need to make sure to separate personal purchases from business expenses and calculate the interest applied to business expenses.
Allowable Interest Expense
In tax years after December 31, 2017, there’s a limit on the amount of business interest you can deduct for businesses that have $26 million or more in gross receipts. The IRS caps the deduction at:
Your business interest income30% of your adjustable taxable income (up to 50%, in some cases)Your floor-plan financing interest expense
Types of Interest That Are Tax Deductible
While personal credit card interest can’t be deducted, there are other types of interest that you may be able to deduct.
Qualified mortgage interest, if you’re the homebuyerInterest paid on investments (limited to your net investment income)Student loan interest, up to $2,500 paid during the year as long as you meet certain basic criteriaBusiness interest, for qualified businesses expenses
The Bottom Line
Consumers can’t deduct credit card interest paid on personal expenses. However, you may be able to deduct credit card interest paid on qualified business purchases, no matter what type of credit card you use. Consult with a tax professional about your tax situation to get specific advice about whether the interest you paid is tax-deductible.
