What Type of Credit Card Interest is Tax Deductible
The IRS allows you to deduct several expenses from your income in order to get to your taxable income, which is the portion of your earnings that is subject to be tax deductible. These expenses can include the interest payments you make on your mortgage, and business loans, however when it comes to the credit cards that you use for personal purchases, the interest that you pay will be nondeductible and considered personal interest.
Personal interest is the interest that you pay when you use a credit card for services and goods, and not for a work or business purpose. Examples of items included in this are electronic equipment, cars, food and clothes. When you make payments on your credit card that include interest then it will always be nondeductible and considered personal interest. This will be true even if you use your credit card in order to subsidize the purchase of a house.
Credit Card Interest That Is Deductible
An exception to the personal interest rule comes from those credit cards you use for business purposes. In general there are a lot of companies, whether they are proprietorship or a corporation that use credit cards in order to buy equipment or to buy supplies that are necessary to run their business and other daily transactions. When you use a business credit card then the interest payments that you make on the card can be deducted as a business expense. This means that you’re able to reduce the amount of business earnings that are taxable in regards to these interest payments. However, if you have a card that you use for both personal purposes and business then you need to make sure that you only deduct the interest that is accumulated on the purchases that were business related. Keep in mind that getting a credit card to be strictly used for business purposes can make it a lot easier than having to calculate all of your business interest and keeping track of all the spending you do for your business. Trying to figure out all the expenses you made for business purposes can be very tricky, and so a separate card will make it a lot easier.
Making Business Credit Card Purchases
When you deduct a business expense, you will typically claim it in the same year that you paid for the item. When you purchase something on your credit card then you don’t necessarily have to pay the bill right away, however you did still make the purchase during that time in the eyes of the Internal Revenue Service. For instance, if you buy an item in December using your credit card and then pay off the credit card balance the following month then you will still count the expense as occurring in December. This means you’ll claim your tax deduction on that year’s income tax return. This will apply whether you use an accrual method or cash method of accounting.
The Tax Reform Act of 1986
The Tax Reform Act of 1986 altered various provisions in the IRS, one of the biggest ones is the elimination of the ability to deduct personal interest. Before 1986, people were able to deduct all of their credit card interest payments no matter what it was that they purchased.
How To Avoid Credit Card Interest that is Nondeductible
In some cases it can be possible to claim your interest as deductible for the purchases that you make using something other than a credit card. For instance, instead of putting your school tuition on your credit card this semester, you may want to look instead at taking out a student loan. By using a student loan, the IRS allows you to the deduct all of the interest payments that you make until you’ve entirely paid off your student debt. By taking out a home equity loan this will allow you to deduct the interest as a mortgage interest deduction.