Have you racked up a lot of credit card debt? If you think that you will get a tax break on the interest you pay, based on the assumption that credit card interest is tax-deductible, you are only fooling yourself.
The IRS certainly doesn’t want to encourage you to fuel your consumption with credit card debt. There was a time when credit card interest was tax-deductible, but that was way back in the 1980s, before the IRS wised up.
Such a deduction may have also encouraged people to speculate in investments with their credit cards, considering that the tax deduction on the interest paid would have effectively lowered their costs. Of course, eliminating the deduction was also a way to boost the government’s income.
With the Tax Reform Act of 1986, the government stopped allowing a tax deduction for consumers on credit card interest payments. According to a study by Victor Stango in the National Tax Journal, by 1991 this maneuver resulted in the lowering of credit card debt by about 14 percent on aggregate than it would have been without the change.
The government also frowned upon auto loan debt and the change took auto loan debt about 9 percent lower. However, mortgage loan debt, which is still eligible for favorable tax treatment on interest you pay, had gained more than 1 percent by 1991.
What kind of interest is tax-deductible?
Currently, the government allows a deduction for interest paid on student loan debt, mortgage loan debt and business loans, among others.
The IRS spells out that the following types of interest are not deductible for tax purposes:
- Interest paid on a loan to buy a car for personal use
- Credit card and installment interest incurred on personal expenses
- Points related to home sales, “service charges, credit investigation fees and interest relating to tax-exempt income, such as interest to purchase or carry tax-exempt securities”
Can you write off credit card interest as a business expense?
While you can’t get a break on the credit card interest you pay on your personal consumption, you could still put in for a tax deduction if you use a credit card to pay business expenses.
If you run a freelance business or are a gig worker—maybe driving for Lyft or Uber or delivering for DoorDash—and take on a loan for any genuine business purpose, maybe on your credit card, the interest you pay will be tax-deductible.
If you use your credit card to pay for a business expense that is also partly personal, you can only deduct that part of the interest paid that relates to the business portion of what you spend. It may be better to have a credit card that is solely tied to your business use to avoid any complications.
How to reduce credit card interest
Even though credit card interest is not tax-deductible, you can still take some steps to reduce the amount you pay in interest charges. For one, you could consider transferring any balance you carry on your card to another card that comes with a promotional 0 percent interest rate.
While this promotion goes on, you will not incur any interest charges on the debt. There’s likely to be a minimal fee, though (typically 3 percent-5 percent of the transferred balance). The key here is to be disciplined enough to pay off the debt before the promotional period ends. Otherwise, you will end up right back where you started, paying the full interest rate on the debt.
And, in a twist, another tax-related way to lower your credit card interest payment is to spend any tax refund the IRS sends your way toward paying off your credit card debt. You may not be getting an actual tax deduction, but Uncle Sam will then be effectively helping you lower your card interest rate.
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