Hooray! I got another feature in a major publication (US NEWS & WORLD REPORT)! But this article is not about me, it about helping you become more tax efficient with your credit cards. Below is a summarized version of the article I was feature in and writer Ben Luthi, did an amazing job on giving this vital information. So without further discussion, lets get into the topic; Is Credit Card Interest Tax Deductible for everyone?
Credit card interest can be tax deductible but not just anyone can do it. Interest paid on personal purchases, for instance, is not deductible and hasn't been since the Tax Reform Act of 1986. Business owners, however, can deduct the interest they pay on their credit cards as a business expense, along with other costs associated with their accounts. But there are some things to keep in mind as you prepare your tax return.
What Credit Card Costs Are Tax Deductible?
If you're a business owner, there are a few expenses you can deduct related to your credit cards. Here's what you need to know about each.
1) Interest
If you used your credit card for business expenses, the interest you paid on those transactions is deductible as a business expense. These are the qualifications required by the IRS:
You must be legally liable for the debt.
Both you and the lender intend for the debt to be repaid.
You and the lender have a true creditor-debtor relationship.
Keep in mind that if you're not liable for the full amount of the debt, you can only deduct the amount of interest that can be attributed to your portion. This scenario can happen with partnerships and other businesses with multiple owners.
2) Credit card fees
Any credit card fees you've paid can be deducted as a business expense. "This includes finance charges, late fees, ATM fees, foreign transactions fees and annual credit card fees," says Cortlon Cofield, owner and advisor of Cofield Advisors, which specializes in financial planning for entrepreneurs.
Make sure to retain your credit card statements so you can keep track of fees and interest you pay throughout the year.
3) Merchant fees
If your business accepts credit cards as a convenience to your customers, you'll pay a small percentage of every transaction to the credit card company that processes it. These merchant fees are deductible as a business expense as well.
The Deduction Doesn't Apply to Personal Expenses
While separating your business and personal expenses can feel like a hassle, there are good reasons for it. "Separating business and personal expenses helps to simplify the process of tracking business expenses," says Will Luckert, vice president of business analysis at Capital One Small Business Card, "which can make tax time much easier, as well as help maximize deductions and minimize tax burdens." While credit card interest accrued on business expenses is deductible, that deduction does not apply to personal expenses, even if they're on the same account. "If you're using your business card for both business and personal use, you'll have to calculate which interest charges are business versus personal," says Cofield. "This will leave you with some tough math to do come tax time."
If you incurred fees on the card throughout the year, you may also need to determine how much of those fees are attributable to your business and how much to your household budget. Tax season is already stressful enough as it is, especially for business owners. Make business finances easier and use a separate credit card for your business.
Personal Credit Cards Used for Business Expenses Count
While interest charged on personal expenses doesn't qualify for a tax deduction, the IRS does not specify that you need to incur interest or fees on a business credit card to qualify for the deduction. Instead, the focus is on the nature of the expense.
You can use a personal credit card for business expenses and still write off any interest and fees you pay on them. Of course, you'll need to be clear about which expenses are personal and which ones are related to your business.
Keep in mind, though, that getting a business credit card can be beneficial for other reasons. For example, you may be able to qualify for a higher credit limit with a business credit card. Also, having a business credit card helps businesses establish credit.
What Other Forms of Interest Are Tax Deductible?
There are other types of interest that you may be able to deduct on your tax return.
Interest paid on business loans. Business owners can also deduct the interest they pay on small business loans as a business expense.
Interest paid on an investment property. If you own a home and use it solely as a rental property, you can deduct any ordinary and necessary expenses associated with the property, including mortgage interest.
Interest paid on a mortgage loan. If you're a homeowner with a mortgage on your primary residence, you can deduct some or all of the interest you paid on the loan throughout the year. The caveat is that you can only deduct interest on up to $750,000 worth of qualified residence loans – or $375,000 if you're married but filing separate returns.
Certain interest paid on a home equity loan or line of credit. Under the Tax Cuts and Jobs Act of 2017, you can only deduct the interest if you use the loan funds to buy, build or substantially improve the home you used as collateral to secure the loan.
Student loan interest. If you paid interest on qualified student loans during the year, you may be able to deduct up to $2,500 of the amount you paid as an adjustment to your gross income.
Aim to Avoid the Deduction, if Possible
Getting a tax deduction for interest paid on a credit card or other qualifying loan can help reduce how much you owe in taxes or even boost your refund. But you'll save more money by avoiding unnecessary interest and fees. "There is an old tax saying that goes, 'don't let the tail wag the dog,'" says Cofield. "Simply put, don't incur excess expenses just for the tax write-off."
As an example, spending $1,000 in deductible interest can reduce your taxable income by $1,000, but your actual savings is only a fraction of that amount. If your effective tax rate is 25 percent, for instance, you're essentially spending $1,000 to save $250. If you can manage to avoid spending that money in the first place, it can bolster your bottom line.
Many business credit cards, for instance, don't charge annual fees. Some even offer introductory zero percent annual percentage rate promotions, allowing you to finance a large expense or even operating expenses for upward of a year, interest-free.
Know What Other Expenses You Can (and Can't) Deduct
The IRS publication on business expenses is lengthy, and many business tax deductions come with caveats or eligibility requirements. Find out for sure whether an expense is deductible before you claim it on your tax return. "All business owners should have a discussion with a tax expert to learn about expenses they can write off," says Cofield.
"Thousands of dollars of write-offs are left on the table every year by business owners not fully understanding what they can expense off their tax return."