You already know you can get a tax deduction for your student loan and mortgage interest, but what about the interest you pay to your credit card company? As with most things tax-related, the answer isn’t exactly straightforward. In the case of credit card interest and fees, what you can and can’t deduct is based on whether the money is a personal or business expense.

Can I Write Off Credit Card Interest on My Taxes?

Have you ever noticed that when you ask a tax question, the answer is almost never a simple yes or no? It often starts with the words “it depends,” and credit card interest is no different. If the IRS classifies interest as personal interest, it’s generally not tax deductible.

Once upon a time, the IRS did allow personal interest deductions. The theory was that doing so would encourage people to spend money and help keep the economy moving. The reality was very different, however.

In actuality, savvy taxpayers saved their money in interest-bearing accounts. They would then use their credit cards or take out a personal loan rather than using their savings to make large purchases. People could then get a tax break on any credit card or personal loan interest they paid while continuing to earn interest on their savings. The IRS closed this loophole in 1986 by doing away with the personal interest tax deduction.

The IRS did not, however, change their handling of business expenses. Business expenses can still include credit card interest and other fees. We’ll go into more detail about this in a minute, but first, let’s take a look at the interest deductions everyone can take.

Tax-Deductible Interest Payments Allowed by IRS

When it comes to interest paid, the IRS allows four basic deductions. The first is any interest paid on a home loan. This includes the mortgage interest and any interest paid on a home equity loan. You can also deduct the mortgage interest you paid while purchasing an investment property.

To encourage higher education, the IRS also allows you to deduct any interest you pay on student loans, which can prove significant. You may additionally deduct your interest if and when it is a business expense. These four situations are the only four in which you may deduct any interest you paid. The IRS classifies any and all other interest as personal interest, and that is not tax deductible.

Non-deductible personal interest includes, but is not limited to, interest accrued or paid on late tax payments, overdue utility bills, car loans, and credit card interest. Everything changes, however, when a business incurs these expenses rather than an individual.

Tax Deductions for Business

credit card interest tax deduction

As we’ve mentioned several times in passing, the rules for interest change when a business is involved. As promised, here are the details you need to know about this deduction. The IRS allows deductions for business expenses, and this is an extremely broad category you want to take advantage of. As a business, your company can and should deduct any interest you pay on your credit card, but that’s not all. Businesses can also deduct credit card fees, including late payment fees, and the annual fee, if applicable.

It’s of note that credit card expenses work both ways for businesses. A business can deduct the expenses associated with having and using a business credit card account. They can also deduct any processing or transaction fees involved with accepting credit card payments from customers.

The caveat here is that any deductions you take absolutely, positively must be for business expenses. Period. Do not try to sneak in any personal expenses. The easiest way to do the accounting on this is to obtain a business credit card and, if desired, a personal credit card. Use each card exclusively for its respective expenses. This makes the accounting easy. If you use the same card for everything, or use the wrong card by mistake, you’ll need to account for it.

Here’s an example. Let’s pretend you have a business credit card and a personal credit card. You run to the store to pick up some office supplies. While you’re there, it occurs to you that you need a new desk chair at home. To save yourself a trip, you decide to buy the chair while you’re at the store. You’ll use your personal card for the chair and charge the other items to your business credit card.

Unfortunately, when you get to the cash register, you realize you left your personal card at home. As such, you charge the entire purchase on your business card. You’re allowed to do this, but you’ll need to keep the receipt and keep track. You can’t count the desk chair you bought as a business expense. You also can’t count any interest you pay on the chair as a business expense. You must remove those charges and fees from the equation before claiming your business expense deductions.

You can track it all however you wish, but it’s infinitely easier to have a separate credit card and use it solely for business expenses. You’ll be very glad you did come tax time.

What if I’m Self Employed?

Self-employment can sometimes muddy the tax waters, but it doesn’t do so in this case. All of the rules for interest and business expenses stay the same. Although you certainly don’t have to do so, you’ll make your life a whole lot easier if you open a separate credit card account for your business.

If you charge both personal and business charges on the same account, you’ll find yourself digging through credit card statements and receipts at the end of the year trying to remember what was a business expense and what wasn’t. Even the very best CPA can’t work with numbers they don’t have, so it will likely fall to you to separate your expenses and figure it all out.

What if Debt is Forgiven?

Dealing with debt forgiven by your credit card company might seem a little off-topic here, but it’s an issue that can have a massive impact on taxes. Unfortunately, it often blindsides people. As such, we like to remind taxpayers about it whenever we can.

Remember that any credit card balances, interest, and fees cease to be deductible expenses if your credit card company agrees to forgive your debt. Not only that, they switch from expenses to income — and taxable income at that. This is super important and worth a repeat: Forgiven credit card debt is taxable income as far as the IRS is concerned. Plan for this, if applicable, so you don’t get caught in a tax trap.

Get Help from a Pro at Picnic Tax

If you’re not sure whether or not you can deduct your credit card interest and other related fees, don’t take on the frustrating task of trying to wade through IRS publications for answers. This exercise usually only serves to make the already frustrated even more so. Instead, reach out to the pros at Picnic Tax. We’re happy to answer your questions and help you deduct whatever you can. We look forward to working with you to make your taxes easier.