Is credit card interest tax deductible? Let’s find out!

Many self-employed people and small business owners wonder if credit card interest is tax-deductible. The answer is both yes and no, to be honest. Please allow me to clarify. Interest paid on a personal credit card is not tax-deductible. In other words, interest paid on a company credit card is tax-deductible.

Surprisingly, credit card interest could previously be deducted on tax returns regardless of the reason for which the credit card was used. Your whole interest payment was deductible on your tax return. Interest paid to credit card issuers could no longer be claimed on your income tax return after the Tax Reform Act of 1086 was adopted, unless it was for commercial transactions.

So, let’s have an in-depth look at the query “Is credit card interest tax deductible?”

What kind of costs are considered business expenses?

So, what are the company's expenses? The costs of doing business are referred to as business expenditures. What expenses may you deduct from your taxes? To be deducted, a corporate expense must be both normal and necessary.

In your business, an average expense is one that is commonly incurred and accepted. A necessary expense is one that is useful to and consistent with your organization's operations. An expense does not have to be absolutely essential to be deemed necessary.

Personal credit card vs. business credit card

Frequently, customers ask, "Do I need a particular business credit card to deduct interest on business-related credit cards?" "No," is the response. While it is not essential, having a separate corporate credit card looks much better during an IRS audit.

We strongly suggest you acquire a business credit card if you own a small business. Most do not have an annual cost, and you may select from a range of alternatives according to your credit score. Annual fees, foreign transaction fees, ATM fees, maintenance fees, and a range of other bank and credit card expenditures are all tax-deductible.

The following are examples of tax-deductible interest payments:

1. Home mortgage interest

House mortgage interest, in general, refers to the interest paid on a loan secured by your home (main home or a second home). You may deduct interest on a home mortgage or business loan if all of the following conditions are met.

  • You fill out Form 1040 or 1040-SR and use Schedule A to itemize your deductions.
  • A mortgage is a secured debt that is backed by an ownership interest in a qualified home.
  • You and the lender must both plan to repay the debt.
  • Mortgage interest can be deducted entirely on the first $750,000 of debt. The lender to whom you made payments reports mortgage interest to you on Form 1098, Mortgage Interest Statement.

2. Student loan interest

Student loan interest is a proportion of the extra charges you paid on an approved student loan over the course of the year. This includes both mandatory and optional interest prepayments.

You can deduct them from your taxes if the amount is less than $2,500 or the total amount of student loan interest paid for the year. When your modified adjusted gross income (MAGI) exceeds the annual ceiling for your filing status, the deduction is gradually reduced until it is eliminated entirely.

You are not needed to itemize your deductions because this deduction is claimed as an adjustment to income.

You may claim the deduction if all of the following conditions are met:

  • You paid interest on an eligible student loan in the tax year 2021;
  • You are legally compelled to pay interest on an approved student loan.
  • You are not married and are filing your taxes individually;
  • Your MAGI is less than a specified yearly limit; and You or your spouse, if filing jointly, cannot be claimed as dependents on another person's return.
  • A student loan that is eligible is one that you obtained largely to pay for recognized higher education expenses that were not covered by your financial aid.
  • For you, your spouse, or a dependant at the time you took out the loan; for education given to a qualifying student during an academic semester; and
  • Paid or incurred within a reasonable time frame before to or after the loan.
  • This deduction is phased down for taxpayers with an adjusted gross income of$70,000 to $85,000 ($14,000 to $170,000 if married filing jointly). If you paid $600 or more in interest on an eligible student loan during the year, the organization to whom you paid the student loan interest will send you a Form 1098-E, Student Loan Interest Statement.

3. Investment interest

You may be eligible to deduct investment interest expenses if you claim itemized deductions. The cost of borrowing money to buy taxable investments is referred to as interest on investments. This includes loans used to acquire stock in your brokerage account. In some cases, you may be able to deduct the interest paid on the margin loan (but not if the loan was used to purchase tax-favored investments such as municipal bonds).

You may deduct the whole investment interest charge if your expenditures exceed your net investment income. If your interest expenses exceed your net investment income, you can only deduct up to your net investment income. Any residual interest expenditures at the conclusion of the fiscal year are carried forward to the next year.

  • The IRS Form 4952 is used to determine deductible investment interest expenditure and carryover interest expense.
  • Payments of interest that are not deductible as a business expenditure
  • When a car loan is utilized only for personal reasons, interest is incurred.

While car loan interest cannot be deducted on a personal vehicle, it can be deducted on a business vehicle if the actual vehicle expense deduction is used rather than the standard mileage rate deduction. Actual car costs include the following:

  • Auto loan interest
  • Auto insurance
  • Gasoline
  • Auto maintenance
  • Tolls and parking fees
  • Interest on a personal loan

A personal loan's interest is not tax-deductible. If, on the other hand, you borrow money and spend 70% of it on business and 30% on a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is interest on personal loans, which is not deductible.

It's very unusual for business owners to mix personal and business expenses, and separating them is not an easy task after all expenses have piled up by tax season. However, if you want to lower your taxable income, it is highly recommended that you segregate personal and business expenses and keep proper records throughout the year.

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