You don’t want to pay too much come tax time, and sorting through all the deductions and tax credits can be confusing.
Amid all this confusion is a lingering question, “Is credit card interest tax deductible?” We’ll answer that question and cover what other items are and are not tax deductible. But first, let’s look at what a tax deduction is and how it differs from a tax credit.
A tax deduction reduces your yearly taxable income to lower your tax burden. For example, if you earned $50,000 in salary in a year and invested $8,000 in a 401(k), which is tax deductible, the IRS will calculate your taxable income as $42,000 ($50,000 minus $8,000). So, you’d pay taxes on just $42,000 instead of the full $50,000 you earned.
This is not to be confused with a tax credit, which is a direct credit toward the taxes you owe. For example, if you owed $10,000 in income taxes based on your salary and bought an electric vehicle that qualified for a $7,500 tax credit, you’d owe only $2,500 ($10,000 minus $7,500) in taxes.
As an individual tax filer, some interest charges are tax deductible, meaning you can subtract them from your taxable income. This lowers your tax burden for the year. However, credit card interest is not tax deductible for individuals.
It’s a different story for businesses, as they can deduct interest charges for all business-related expenses. So, if you used a credit card to purchase a $200 printer for your business and paid $25 in interest while paying it off, you can deduct that $25 from your business income at tax time.
Credit card interest isn’t the only interest charge that’s not tax deductible. There are three other common interest charges you can’t deduct from your taxable income.
- Personal loan interest: Whether it’s an auto loan, a debt consolidation loan, or another loan strictly for personal use, the interest charges aren’t tax deductible.
- Mortgage points as a seller: If you sell your home and pay some of the buyer’s mortgage points — prepaid interest — to help close the deal, you can’t deduct these points like you could as a buyer.
- Interest for tax-exempt income: If you take out a loan to invest in a tax-exempt income stream, like tax-exempt securities, you can’t deduct the interest charges from your income.
Though credit card interest, personal loan interest, seller mortgage points, and interest paid for tax-exempt income may not be tax deductible, there are plenty of other interest charges that are tax deductible.
Investment interest is tax deductible. No, not the interest you earn. We’re talking about the interest on any loan you took out to purchase a taxable investment, like purchasing stock on the margin.
Homeowners can deduct the interest they paid on their mortgage, but there is a limit to the mortgage’s amount.
- Any home purchased before October 13, 1987 can have the mortgage interest deducted with no limits on the mortgage value.
- Any home purchased from October 13, 1987 through December 16, 2017 can have the mortgage interest deducted on up to a $1 million mortgage balance if married and filing jointly or $500,000 as an individual filer.
- Any home purchased from December 17, 2017 and onward can have its mortgage interest deducted on up to a $750,000 mortgage if married and filing jointly. Individual filers are limited to $375,000.
The loans that qualify for this deduction are any you used to buy, build, or improve your home. Even a home equity loan, home equity line of credit (HELOC), or second mortgage may qualify.
You may even deduct some or all the mortgage points — prepaid interest — you paid to reduce your interest rate during the loan-origination process. You can deduct these points in the year you paid them if they meet a range of IRS qualifications.
While student loans can be a burden, at least you can deduct any interest you pay on them from your taxable income, reducing your tax burden.
Credit cards come with no shortage of fees, including:
- Annual fees
- Late fees
- Cash advance fees
- Balance transfer fees
- Foreign transaction fees
As an individual taxpayer, these credit card fees aren’t tax deductible. However, like interest expenses, corporations and small businesses can deduct these credit card fees if they use the card solely for business purposes.
While credit card interest isn’t tax deductible, you can still use it to make tax-deductible purchases. You can earmark a specific credit card for making tax-deductible payments and purchases for easier tracking.
On top of helping to keep your deductible expenses separate, you can earn valuable rewards while making these tax-deductible purchases if you use a rewards credit card. Remember to pay your credit card in full when you receive your monthly statement to avoid any interest charges.
Here are some of the tax-deductible expenses you can pay with your personal credit card.
If you’re a freelancer or self-employed, you can write off non-depreciating business expenses, such as portions of business dinners, software, inexpensive hardware and equipment, building repairs, subscriptions, and more.
And if you want to keep these deductions separate from your personal expenses and deductions, you can even use a business credit card for easier tracking come tax time.
You can receive tax deductions for charitable donations. Of course, standard IRS guidelines for deductible charitable donations remain:
- Deductions can’t exceed 50% of your adjusted gross income (AGI) — your yearly income minus all deductions.
- Donations must be to a qualified organization
- Donations must be made within the tax year you’re deducting it
If you don’t escrow your property or real estate taxes, you will receive a bill every year for them. Property and real estate taxes are tax deductible, and some local tax collectors will allow you to make these payments via credit card.
If you’re a teacher, you’ve likely become accustomed to paying some classroom expenses out of pocket. Fortunately, you can deduct up to $250 worth of unreimbursed classroom expenses — like paper, pencils, and crayons — each year.
You can make these purchases on a credit card for easier tracking. Plus, you may be able to get some credit card rewards in the process.
If your family’s combined out-of-pocket medical expenses — those not covered by insurance — exceed 7.5% of your AGI, you can deduct those expenses that exceed the 7.5% threshold. Plus, most hospitals, medical centers, and doctors’ offices accept credit cards.
For example, if you earn $100,000 per year and have $10,000 in medical bills, $2,500 of that $10,000 is tax deductible.
Though credit card interest isn’t tax deductible, there are other ways they can help you with your taxes.
One primary way they help is you can dedicate a specific credit card to your deductible expenses, so it’s easier to see your deductions at a glance when preparing your tax return. On top of the added organization, if you use a rewards credit card and pay off the balance every month by the due date, you can earn rewards points or cash back and incur no interest charges.
So, with responsible credit card use, you can keep your taxes in better order and earn some rewards along the way. It’s a win-win.