Key Takeaways
- Credit card interest is not deductible on income taxes.
- The personal interest deduction was eliminated in the Tax Reform Act of 1986.
- Interest payments on home loans, student loans, and investment property may be tax-deductible.
- Personal expenses cannot be deducted as business expenses.
Interest deductions
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.
TurboTax Tip:
Business interest, including credit card interest, may be deductible if it is related to a trade or business activity.
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 investment property
- 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.
With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Our small business tax experts are always up to date with the latest tax laws and will ensure you get every credit and deduction possible, so you can put more money back into your business. Small business owners get access to unlimited, year-round advice and answers at no extra cost and a 100% Accurate, Expert Approved guarantee.