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When asking whether the interest on a credit card is tax deductible, the answer is not straightforward. For some people, tax deductions are a confusing subject as a whole, so it is no surprise that people get confused over tax deductions on credit card interest. However, the following information should provide some clarity.
Is Credit Card Interest Tax Deductible?
Interest paid on these personal expenses is not tax deductible. Personal credit card interest is the amount of interest that you pay when purchasing non-business related items such as a personal vehicle, household groceries, personal clothing, electronics, pet supplies, and so on. Personal credit card use also involves using a credit card for home purchases like furniture and appliances.
Credit Card Interest is Deductible on Business Credit Cards
By contrast, business interest relates to any purchases made specifically for your business including office supplies, equipment, office furniture, and employee uniforms, among other things. Today, it is common for all types of companies to rely on credit cards. Along with buying things for the business, people use credit cards to pay rent, make vehicle loan payments, and more.
As long as the interest you’re paying has to do with business, then your credit card interest is tax deductible. Therefore, you are allowed to reduce the number of your business earnings subject to taxation for interest payments. Just remember, if you use the same credit card for both personal and business purchases, make sure that you only deduct the interest accrued for the business side.
History of the Credit Card Interest Deduction
The history of the credit card interest deduction dates back to the Tax Reform Act of 1986. This act changed several provisions found in the Internal Revenue Code. Before 1986, virtually all interest payments on credit cards were 100 percent deductible, whether the purchases were for personal or business-related items.
The benefit of this act was that it reduced the top tax rate, taking it from 50 percent to 28 percent. At the same time, the act increased the bottom tax rate, moving it to 15 percent from 11 percent. While some people felt the 1986 Tax Reform Act was fair, others felt it was unfair. The one thing that everyone agreed on was that this tax law was the most sweeping seen in more than five decades.
Since that time, tax laws have undergone many significant changes, which included the Bush tax cuts that took place in the early 2000s. However, no other tax legislation in history has had such a profound and broad impact on the landscape than the Tax Reform Act of 1986. All of these years later, it still has an impact.
How to Avoid Credit Card Interest
Everyone wants a tax break. By making a few simple decisions, you too can avoid paying interest on credit card purchases. The obvious solution is to pay for things in cash rather than to use a credit card. However, if that is not a realistic option, perhaps you might consider a loan. For instance, if you or someone that you employ needs to complete training for the company, instead of paying for the education using a credit card, you could take out a small student loan. The great thing about that decision is that the IRS allows you to deduct student loan interest payments (up to $2,500 within a tax year).
Another option (and probably the most practical) for avoiding interest on credit cards is to pay your balance in full for each billing cycle and make payments on time. Not only will this eliminate the issue of paying interest, it will also help you look more creditworthy. You can also transfer the balance of a high-interest credit card to one with a 0 percent APR introductory period, but there are some risks associated with that strategy.
Author: Jeff Gitlen
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