Kimberly Rotter for Credit Sesame Daily writes: With tax-time right around the corner, many of us are looking for ways to reduce our liability to Uncle Sam. For consumers who carry a balance, credit card interest can be a significant expense throughout the year. Is credit card interest a line item we can use to lower our taxable income? Yes and no.
When credit card interest is tax deductible
On any credit card that is used solely for business purposes, the interest is tax deductible. Each purchase must qualify as a business expense under the IRS’s rules. Deduct purchases in the year the purchase is made. Deduct interest in the year you pay it.
When credit card interest isn’t tax deductible.
Credit card interest incurred for personal expenses is not tax deductible. The IRS calls this “personal interest” and offers no tax benefit.
Interest paid on a personal auto loan, on appliances or furniture, on medical procedures and on person-to-person loans is also considered personal interest and is not deductible. Interest paid on a mortgage, however, is deductible. And interest for an auto loan that is strictly for business use is also deductible.
When it gets messy
Like any other expense, if it is partly for business and partly for personal use, credit card interest is deductible in the same proportion as the amount used for business purposes. For example, if you take a loan and use 75 percent of the funds to buy business equipment and 25 percent of the funds to take a family vacation, 75 percent of the interest is deductible. On a credit card, a more common scenario is that a percentage of purchases are business-related and a percentage are personal.
If you use the same credit card for personal and business use, you are legally entitled to deduct the interest paid on business purchases. But a taxpayer who regularly comingles accounts and expenses will have a hard time calculating the correct amount of interest to deduct without fairly advanced math skills. Interest on personal expenses charged to a business card is not tax deductible just by virtue of being on a business card.
More tax deduction tips
Deductible non-business interest. The IRS allows individuals to deduct the interest paid on home loans (mortgages and home equity loans) and student loans. Also, interest paid on money borrowed for the purchase of investment property is tax deductible.
Fees and charges. The annual fee, ATM fees, foreign transaction fees, maintenance fees and many other bank and credit card fees are also tax deductible, so long as the account is used for business purposes.
Other business deductions. Self-employed people can deduct a number of expenses that employed taxpayers cannot, including mileage to and from work-related locations away from the home office, and even a portion of the home’s utility costs.
One final tip. The credit card does not have to be designated a business card by the card issuer in order to qualify as a business account in the eyes of the IRS. The consumer can call any credit card a business card. Keep receipts in case of an audit, and again, use the business card only for business expenses.
Talk to a licensed tax professional about what deductions are appropriate for you.
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