Taxes season is right around the corner, and you might be scrambling to find every deduction and write-off possible. While doing so, you might have wondered about that credit card interest you’re paying every month.
Unfortunately, your personal credit card interest is not eligible for a tax write-off, but there are many other options to consider. In this article, we’ll cover business and personal interest tax deductions, and how you can make the most of these opportunities.
Table of Contents
- 1 Business Interest Tax Deduction
- 2 Personal Interest Tax Deduction
- 3 What Types of Interest Can be Written-Off or Deducted from Taxes?
Business Interest Tax Deduction
Business owners are the one exception to the aforementioned rule. Not only do they get to write off business-related travel expenses and office supplies, credit card interest is also tax-deductible. If you own a business or run your own side hustle, this is a good reason to have a separate credit card for business purposes only.
There are three types of credit card fees that business owners might be able to write off on their tax deductions:
- Any credit card interest you’ve paid on business purchases.
- Annual fees (this applies exclusively to business cards and will not work if you also use the card for personal purchases).
- The credit card “swipe fees” you have to pay when receiving a payment from clients or vendors. This also includes the percentage fee PayPal charges.
Talk with your tax expert or CPA to determine your eligibility of these tax deductions, and keep in mind that keeping your personal and business purchases on separate cards and accounts will help tremendously.
Personal Interest Tax Deduction
What is the Personal Interest Tax Deduction?
Before the Tax Reform Act of 1986, you could claim tax deductions on any personal interest from loans, like a car loan or your personal credit cards. The problem became that it created an unintended incentive for people to buy too much. You could get yourself deep into debt to offset your income, and pay little to no taxes at all, even though this would put you at greater financial risk. This over-utilization of credit could sharply reduce tax revenues, as consumers wrote-off all their personal interest. Between the threat to tax revenue and the risk to consumer credit and stability, the personal interest deduction had some severe side-effects.
What Happened to the Personal Interest Tax Deduction?
Since the personal interest tax deductions encouraged people to spend more than they could afford, and ultimately harm not only their personal finances but also significantly hurt tax revenues, the Tax Reform Act of 1986 eliminated the ability to claim any deductions on your personal interest fees. However, that wasn’t the end of deducting interest payments on loans — the government just became a little more deliberate in what types of loans would qualify, and what incentives it created with interest deduction laws.
What Types of Interest Can be Written-Off or Deducted from Taxes?
The IRS states that only three categories are eligible for tax deductions on interest (other than business):
Mortgage Interest Deduction
Taxpayers who own their home instead of renting can write-off their mortgage interest in the U.S., but there are several limitations.
- You must elect to itemize deductions which must total more than the standard deduction.
- The mortgage interest deduction is limited to your first or second mortgage only.
- Deductible interest is limited to $750,000 in mortgage and home equity debt.
In December, 2017, President Trump signed the Tax Cuts and Jobs Act into law. The mortgage interest deduction portion of this law changed the $1 million limit to $750,000 for homes purchased after December 14, 2017. Current loans (or those originated prior to the law) remain subject to the $1 million cap. As written, the law will only remain in effect until 2025, when mortgage interest deduction rules will revert to the previous limit of $1 million.
Student Loan Interest Deduction
Taxpayers can deduct up to $2,500 a year in student loan interest, as long as you make less than $80,000 a year. The eligible deduction amount can fluctuate based on your income, and you can only deduct interest paid on loans from qualified sources. In this case, loans from an employer or family member won’t qualify.
Keep in mind that the student loan interest tax deduction is no reason to prolong paying off your student loans. The tax deduction will only be a portion of the amount of interest you’re paying on the loans, so you’ll save even more by paying them off as soon as possible. Paying off your student loans on time will also have a positive effect on your credit score.
Investment Property Interest Deduction
The mortgage interest deduction mentioned above only applies to your primary residence or a second home that you live in for a portion of the year. Other investment properties or rentals don’t apply for the same deduction.
However, you can deduct the costs of an investment property as rental business expenses. These are some examples of costs you could deduct from your rental income:
You can no longer deduct personal interest paid on your credit cards from your taxes, unless you own a business and you are deducting interest paid on business expenses. You can, however, claim write-offs for mortgage interest paid, student loan interest, and investment property interest and costs. Hopefully this information has given you a better idea of your potential tax write-offs.
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