Is Credit Card Interest Tax Deductible?

Article Summary:

In general, credit card interest for personal cards is not tax-deductible. However, the IRS does consider credit card interest tax deductible when it’s for business expenses. That being said, there are ways to reduce credit card interest payments for personal expenses, including transferring debt to a balance transfer card, and using tax refunds provided by the IRS to pay off any outstanding credit card debt.

Personal credit cards have become one the most popular methods of payment in modern times. They allow users to manage their cash flow by delaying payment to a later date. Many credit card companies now offer extensive rewards programs that give users points based on how much money they spend and what they spend it on. The points can then be used to buy other things at a discounted rate, or even free in some cases.

However, credit cards also have their downsides — namely, credit card interest. If their outstanding balance isn’t paid in full, credit card companies will charge consumers interest on their purchases each month. In certain cases, depending on the types of expenses, this credit card interest may be tax-deductible.

Can you deduct credit card interest?

No, unfortunately, you can’t deduct credit card interest when you file your taxes. Although you can deduct several types of interest payments, such as student loans, business loans, and home loans, credit card interest isn’t one of them.

It wasn’t always like this. Back in the 1980s, you were allowed to deduct credit card interest, but the Tax Reform Act of 1986 put an end to that. The argument for changing that is that the Treasury Department didn’t want to be seen as encouraging consumers to get into debt instead of saving. However, the increase in tax revenue from removing this tax deduction may (cough, cough) have played a role also.

Credit cards for personal vs. business expenses

Whether your credit card is eligible for tax-deductible interest payments all depends on how you use the card.

Interest on personal expenses

Any interest incurred through personal expenses is not tax-deductible. There was a time shortly after the rise of credit card use that it was, but the IRS has since changed its rules. The Tax Reform Act of 1986 stopped allowing a tax deduction for consumers on credit card interest payments. Personal credit card interest is taxed under this law.

This also means consumers cannot deduct interest from a personal credit card used on loans for personal expenses, service charges, and interest associated with tax-exempt income.

Interest on business expenses

There are certain instances where consumers can receive a tax break on their credit card interest, such as if they use a credit card for business expenses. For example, freelance or gig workers (such as driving for Uber and Lyft) who take out a loan on their credit card for business purposes can write off any interest paid as a business expense, thereby making it tax-deductible.

However, if you use a credit card for both personal and business expenses, you are only allowed to deduct credit card interest from your business credit card. Businesses are also able to deduct interest on credit or debit processing expenses they incur when paying their taxes.

Pro Tip

To avoid any complications or confusion surrounding interest charges, it’s best to keep your individual credit card and business credit card separate.

How to reduce credit card interest

Even though credit card interest is not tax-deductible, there are still ways in which you could reduce it so that your payments aren’t as high.

The most popular and easiest way to lower credit card interest is to transfer any balance you carry on your card to a balance transfer card. These often come with a promotional 0% interest rate. While this promotion is ongoing, you won’t incur any interest charges on your credit card debt.

To pay off your debt, you can also lower your credit card interest charges by using any tax refunds you receive from the IRS. While this won’t provide you with an actual tax deduction, it can be a way to make a big dent in your credit card debt, which will lower the amount of interest you pay.

In some instances, you can also ask your credit card company to lower your interest rate, though whether or not they are inclined to do so depends on your standing with them and your credit score, among other factors.

Pro Tip

There is typically a minimal fee of between 3% to 5% on these balance credit cards, so you’ll want to try paying off your debt before the promotional period ends.

Can I deduct credit card fees from my taxes?

As is the case with interest payments for personal and business cards, credit card fees are not tax-deductible for personal cards but are for business cards. Even with this delineation, however, it still depends on what types of fees are incurred.

Deductions for personal credit card fees

The Tax Cuts and Jobs Act that went into effect in 2017 represented the largest overhaul of the tax rules in 30 years. It removed business expenses used by individuals, such as vehicular costs, among other things.

Because of this, individual taxpayers cannot deduct fees and transaction costs associated with credit and debit cards.

Deductions for business credit card fees

Businesses, on the other hand, can deduct a whole host of expenses under this Act. Virtually any business credit card fee incurred is may be deducted as a business expense, including late fees, annual fees, monthly fees, and finance charges, among others. However, these charges must be associated with the business to qualify.

Furthermore, businesses can also deduct the fees they pay to accept credit cards as a merchant. Both the credit network processors and the merchants themselves pay fees related to these transactions, so giving businesses the opportunity to make these tax-deductible offers a welcome reprieve.

Pro Tip

Small business owners should regularly update bookkeeping and accounting practices to ensure that they are providing the IRS with the most current and accurate tax information.

Are credit card rewards taxable?

This depends mostly on how the rewards are received by the individual. For example, if the rewards are received as a sort of cash-back bonus, the IRS considers this to be a rebate and therefore does not consider this taxable income.

Rewards that are received as an incentive, such as through the opening of a new account, may be considered taxable income because you are not actively spending any money in order to receive them. They can’t be considered a rebate because you did not spend any of your own money.

Do credit card payments get a 1099 form?

Businesses do not need to prepare a 1099-NEC or a 1099-MISC tax form for credit card payments. However, any contractors who accept payment via credit cards or through another third-party payment platform like PayPal must prepare a 1099-K form.

Prior to 2022, a 1099-K form only needed to be prepared if (1) transactions exceeded $20,000 or (2) the aggregate number of transactions exceeded 200. Starting in 2022, however, that reporting threshold has been dropped to $600, and the transaction minimum has been eliminated.

Are credit card payments reported to IRS?

It depends on what you mean by credit card payments. You don’t have to report credit card payments for personal expenses or purchases. However, businesses should report all credit card payments they receive or make as part of their business and meet the minimum reporting threshold ($600 in 2022), you will need to fill out a 1099-K tax form.

Key Takeaways

  • Credit card interest for personal consumption is not tax deductible. However, you can receive tax deductions if you use a credit card for a business expense.
  • When you use a personal credit card to pay for something like student loan interest, the IRS allows you to deduct the interest payments on it until it is fully paid off.
  • The most popular and easiest way to lower credit card interest is to transfer any balance you carry on your card to a balance transfer card that comes with a promotional 0% interest rate.
  • Contractors who accept payment via credit cards or another third-party payment platform will need to prepare what’s known as a 1099-K if their transactions exceed $600.
  • Credit card rewards are considered taxable depending on how they’re received. If the rewards are a cash-back bonus, the IRS considers this to be a rebate. However, if the rewards are received as an incentive, such as through the opening of a new account, this might be considered taxable income.
View Article Sources
  1. Americans pay $120 billion in credit card interest and fees each year — Consumer Financial Protection Bureau
  2. Rising Credit Card Interest Rates and Fees — Michigan Department of Attorney General
  3. Do I Have To Pay Taxes On My Checking Account? — SuperMoney
  4. How Much Do I Owe the IRS? Find Out If You Owe Back Taxes — SuperMoney
  5. 2021 Consumer Credit Card Industry Study — SuperMoney
  6. The Best Tax Relief Companies | April 2022 — SuperMoney
  7. Best Personal Credit Cards | April 2022 — SuperMoney