When the tax time comes, you are undoubtedly looking for ways to reduce the amount of tax due or increase the refund you receive. Interest on credit cards would be a nice tax deductible, especially if you paid hundreds of dollars in interest per year. Is credit card interest tax deductible?
You cannot deduct personal credit card interest from taxes
A bit of history: The 1986 Tax Reform Act eliminated interest on personal credit cards as tax deductible costs. In other words, you cannot deduct interest accrued from your daily purchases from taxes. This includes interest paid on personal loans, furniture, medical expenses and more.
Before this act, all consumer interests could be deducted. But you can’t do it now, with some exceptions. This can often be very confusing for consumers.
Interest deductible from tax
According to the IRS, only a few categories of interest payments can be tax deductible:
- Interest on housing loans (including mortgages and housing loans)
- Interest on outstanding student loans
- Interest on money borrowed for the purchase of investment property
- Interest as a business cost
All other interest is considered personal interest, including interest accrued on credit cards, car loans, unpaid utility bills, and late payment or underpayments by federal, state and local income taxes.
Ways to avoid irreducible interest on your credit card
Sometimes it may be possible to request a purchase interest deduction using a payment method other than credit cards. For example, instead of using a credit card to pay school tuition this semester, you may want to consider student loans first. When you use a student loan, the IRS allows you to deduct the interest paid off until you pay it back. In the tax years preceding 2018, interest on a home equity loan was deductible and could provide cash for personal purchases, as well as allowing interest to be deducted as part of mortgage interest deduction. However, starting from 2018, interest on home loans cannot be deducted unless it is used to buy, build or significantly improve the home.
How to reduce interest rates on credit cards in 2020
There are ways to reduce the interest rate on your credit card this year, including transferring the balance to the card from a 0% promotional APRC.
With the help of balance transfer, you can transfer your credit card balance from a higher interest rate card to a zero interest rate card for a specific period of time, for example 12 or 15 months.
But you will most likely have to pay a balance transfer fee, which is usually between 3% and 5% of the balance transferred. And if you do not pay the balance within the allotted time, the interest rate will increase.