Can Credit Card Interest Be Tax Deductible?

The deductibility of credit card interest for tax purposes is a common question for many individuals. While generally not deductible, specific exceptions exist under tax law that allow for such deductions in limited circumstances. Understanding these nuances is important for proper tax reporting.

General Rule for Personal Credit Card Interest

Interest paid on personal credit cards used for consumer purchases is generally not tax deductible. This applies to expenses like vacations, everyday living costs, or personal goods. The Tax Reform Act of 1986 eliminated the deduction for personal interest, classifying it as a non-deductible personal expense.

Internal Revenue Code Section 163 disallows deductions for personal interest for non-corporate taxpayers. If you use a credit card for personal items, the interest cannot reduce your taxable income. This contrasts with certain other types of interest, such as qualified student loan interest or home mortgage interest, which may be deductible.

When Credit Card Interest Can Be Deductible

While personal credit card interest is generally not deductible, specific situations allow it to be claimed. The key distinction lies in the purpose of the credit card use.

Business Expenses

Interest on credit cards used exclusively for legitimate business expenses can be deductible. For an expense to qualify, it must be both “ordinary and necessary” for your trade or business, as defined by Internal Revenue Code Section 162.

An ordinary expense is common and accepted in your industry, while a necessary expense is helpful and appropriate. Examples of deductible business expenses include supplies, business-related travel, advertising costs, and professional services. If a credit card is used for both business and personal purposes, only the interest directly attributable to the business portion is deductible.

Investment Interest

Interest paid on credit cards used to purchase taxable investments, such as stocks, bonds, or mutual funds, may also be deductible. This is known as investment interest expense. The deduction for investment interest is limited to your net investment income for the tax year. Net investment income includes gross income from property held for investment, such as interest, dividends, and certain capital gains. Interest incurred to purchase tax-exempt investments does not qualify for this deduction.

Record Keeping and Reporting Deductible Interest

Good record-keeping is important when claiming any deductible credit card interest. Maintain clear documentation to substantiate the business or investment purpose of the expenses. This includes detailed credit card statements showing qualifying purchases, along with supporting documentation like business ledgers, receipts, or investment account statements.

It is important to separate personal and deductible expenses to avoid commingling, which can complicate tax reporting. For sole proprietors or single-member LLCs, deductible business interest is reported on Schedule C (Form 1040). Investment interest expense is calculated on Form 4952, and the allowable deduction is then reported on Schedule A (Form 1040). Maintaining accurate records is advised, as these deductions can attract attention from the IRS.