When you sit down to calculate your federal income tax, you look for every possible tax deduction you can legitimately claim. Americans spend significant amounts of money each year on credit card interest as they try to pay down their debt. On the hunt for deductions, many people ask themselves: Is credit card interest tax deductible?
Unfortunately, credit card interest is not always deductible. The federal government creates tax deductions to incentivize certain behaviors, and getting into debt with credit cards is not a behavior the government wants to encourage. If citizens could deduct credit card interest from their income taxes, they’d have one more reason to keep their credit card balances high. Credit card interest is not always tax deductible, but there are some circumstances when credit card interest can be a tax deduction.
Business Expenses Versus Personal Expenses
The key to determining whether credit card interest is deductible is whether the expenses are personal or for business. Business expenses and any credit card interest accrued on those expenses are deductible; however, personal expenses and related credit card interest are not deductible.
Are you still paying off that treadmill you bought when you made a New Year’s resolution to get more exercise? That credit card interest is not deductible. Are you still paying off the backhoe for your landscaping business? That interest is deductible.
It sounds simple, but calculating your allowable deduction can be a pain when you mix personal and business purchases on the same card. If you expect to accrue interest on business purchases, having a credit card solely for business use makes your life much easier during tax season. You can mingle business and personal expenses on a credit card, but figuring your credit card interest deduction will take you some serious time and brain power. Save yourself some complicated math and open a separate credit card for your business expenses.
Other Types of Deductible Interest
While credit card interest is a fairly uncommon tax deduction, other types of interest deductions are far more common. Plus, you may be able to shift your credit card balance to another form of debt and then take advantage of a tax deduction.
Mortgage Interest Deductions
For the vast majority of American homeowners, the mortgage interest deduction allows them to reduce their taxable income by the amount of mortgage interest they paid. This deduction is capped to the interest accrued on $1 million in debt from loans made prior to Dec 14th 2017. Under the Tax Cuts and Jobs Act signed into law on December 22, 2017, that cap went down to $750,000 in debt on mortgages taken out December 14, 2017, or later.
Home equity loan interest is deductible in the same way mortgage interest is deductible. If you have enough equity in your home to borrow against, it may be advantageous for you to pay off credit cards by taking out a home equity loan. That way, your credit card is paid off, and the interest you pay is deductible on your federal income taxes.
Student Loans Interest Deductions
Student loan interest is another common deduction on federal income taxes. As long as you fall under the income threshold, you can deduct up to $2,500 in interest paid with the American opportunity tax credit. The threshold depends on whether you file as single, head of household, qualifying widow, or married filing jointly.
While the deduction applies to both subsidized and unsubsidized loans equally, subsidized loans have repayment options where interest is forgiven for a period of time. These income-driven repayment plans limit a borrower’s student loan payments to 10 percent of discretionary income. When a borrower’s payment doesn’t cover the interest amount, the federal government kicks in the needed funds to cover it.
Heres an example. Say a borrower has a $45 monthly student loan payment. The interest that accrues each month is $100. With income-driven repayment plans, the federal government subsidizes the remaining $55 in interest.
Under the Income-Based Repayment (IBR) Plan, Pay As You Earn (PAYE) Plan, and Revised Pay As You Earn (REPAYE) Plan, the federal government pays for up to three years the interest the borrow can’t cover. The REPAYE plan also covers half the unpaid interest after the first three years.
Auto Loans for Business Interest Deductions
Like credit cards, the federal income tax deduction on auto loans is reserved for business expenses. Interest on personal auto loans is not deductible.
The Bottom Line on Credit Card Interest
Is credit card interest tax deductible? Yes, but only for business purposes. The federal government does not want to encourage citizens to sink themselves into credit card debt, so tax laws do not incentivize this behavior. If you’ve fallen into credit card debt, you may be able to move your debt into a home equity loan which allows for the interest deduction on your federal tax return.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.