Is Credit Card Interest Tax Deductible?

If you’ve racked up some credit card debt and are paying interest each month, you might be looking for ways to offset your debt with deductions come tax season. However, while the Internal Revenue Service (IRS) once considered credit card interest tax-deductible, that’s no longer the case.

With the Tax Reform Act of 1986, the government stopped allowing tax deduction for consumers on credit card interest payments, arguing that the deduction encouraged growing consumer debt. Such a deduction may have also encouraged people to speculate on investments with their credit cards, considering that the tax deduction on the interest paid would have effectively lowered their costs.

You may be out of luck if you were crossing your fingers for a write-off in the upcoming tax season when it comes to credit card interest. However, there are a few exceptions for individuals with business expenses, among a few other things.

What kind of interest is tax-deductible?

Currently, the government allows a deduction for interest paid on outstanding student loan debt, mortgage and home equity loan debt, business expenses and interest on money borrowed to purchase investment property. Any other kind of interest is considered personal interest and anything that falls under this category is not tax-deductible.

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 (if you’re a seller), 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 for 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 business purposes, 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 to avoid any complications. However, the IRS does not require the use of a business credit card in order to qualify for a deduction in this case.

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 balance transfer card that comes with a promotional 0 percent interest rate. While this promotion goes on, you won’t incur any interest charges on the debt. There’s likely to be a balance transfer fee, though (typically 3 percent to 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.

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 the refund will then effectively help you lower your card interest rate.

The bottom line

Even though you can write off interest paid on a credit card for business expenses, keep in mind it is always best to try to avoid interest in the first place — especially when it’s avoidable with the right discipline. You may be able to save a few bucks when tax season inevitably pops up on the calendar, but you’ll save more by avoiding interest and fees by fully paying off your balance.

If you can’t, though, that’s okay. Instead, you should try to plan ahead. If you know you are going to face a few large expenses for your business, sign up for a credit card with a 0 percent APR period and always pay your bills in full and on time.