Can You Write Off Credit Card Interest?

Credit card interest is a common expense for many individuals. While the general rule is that interest paid on personal credit card debt is not tax-deductible, there are specific, limited circumstances where it may be. Understanding these distinctions is important for managing your financial obligations and tax planning.

The General Rule for Personal Interest

Interest accrued on credit cards used for personal, family, or household expenses is generally not deductible on federal income tax returns. This has been the case since the Tax Reform Act of 1986, which eliminated the deduction for personal interest. The Internal Revenue Service (IRS) classifies this type of debt as consumer interest, and it is considered a non-deductible personal expense. For instance, interest on credit card charges for vacations, daily living costs, or personal car loans does not qualify for a tax deduction.

Specific Situations for Deductible Interest

Despite the general rule, there are specific scenarios where credit card interest may be deductible, depending on the purpose of the underlying charges. The key factor for deductibility is how the borrowed funds were used, not the credit card itself.

Business Expenses

Interest on credit cards used exclusively for legitimate business expenses can be deductible. This applies to self-employed individuals, freelancers, and business owners who use credit cards to purchase items necessary for their trade or business, such as office supplies, equipment, or travel. The interest must be considered an ordinary and necessary expense for the business to qualify. If a credit card is used for both personal and business expenses, only the portion of interest directly attributable to the business charges is deductible.

Investment Interest

Interest paid on credit cards used to purchase property held for investment, such as stocks, bonds, or mutual funds, may be deductible. This is known as investment interest. However, this deduction is generally limited to the amount of net investment income you report for the year.

Qualified Residence Interest (Limited Circumstances)

Credit card interest is not typically considered qualified residence interest, which refers to interest on a mortgage used to buy, build, or substantially improve your main home or a second home. However, a very narrow exception exists if the credit card was used to pay for home improvement expenses and the debt is subsequently secured by the home. For example, if credit card charges for home improvements are later consolidated into a home equity line of credit (HELOC) or a home equity loan, the interest on the HELOC or loan may become deductible as qualified residence interest.

Essential Record Keeping for Deductions

Meticulous record-keeping is paramount if you intend to deduct credit card interest. This includes maintaining clear documentation that links credit card charges to their specific business or investment purpose. You should keep credit card statements, receipts for all purchases, and any other relevant documentation that proves the expense was for a deductible purpose. If a single credit card is used for both personal and deductible expenses, it is important to clearly differentiate between them. This detailed record-keeping helps calculate deductible interest and is important in case of an audit.