Updated for Tax Year 2014
You're allowed to take a tax deduction for some types of interest payments. Can I write off credit card interest on my taxes?
You're allowed to take a tax deduction for some types of interest payments, but unfortunately, credit card interest is not among them. The tax code classifies the interest you pay on credit cards as "personal interest," a category that hasn't been deductible since the 1980s.
However, if you own a home, there is a way to convert non-deductible personal interest into a tax-deductible expense.
History of the personal interest deduction
Credit card interest and other forms of personal interest were deductible on income taxes some years ago, but Congress eliminated those deductions in the Tax Reform Act of 1986.
According to the Treasury Department, the personal interest deduction was seen as encouraging Americans to spend money rather than save it; in reality, it also reduced tax revenues. That's because money that people put in savings earned them interest, which was taxable income, but if they ran up credit card debt, they could deduct the interest from their income, which lowered their tax liability.
Tax-deductible interest payments
According to the IRS, only a few categories of interest payments are tax-deductible:
- Interest on home loans (including mortgages and home equity loans)
- Interest on outstanding student loans
- Interest on money borrowed to purchase
- Interest as a business expense
All other interest is considered personal interest, which includes interest charged on credit cards, auto loans, unpaid utility bills and late payment or underpayment of federal, state and local income taxes.
Credit card interest as business expense
Credit card interest is never deductible for individuals, but it's a different story when a business is involved.
"Business interest," meaning interest paid on any loan taken out for business purposes, is considered a legitimate business expense, and that includes interest on credit cards. However, the debt must be related to a trade or business activity. You can't use your company credit card for personal expenses and then deduct the interest.
The home equity option
If you own your home and have enough equity in it to borrow against, you may be able to trade in your non-deductible credit card interest for home equity interest, which is not only tax-deductible but also may carry a significantly lower rate.
The IRS allows you to deduct interest on home-equity loans up to $100,000, no matter how you use the money. So you can potentially take out a home equity loan, use the money to pay off your credit cards and then deduct the interest as you pay off the home equity loan.
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