There are certain expenses you can deduct from your total income in order to get the exact taxable income according to the IRS. This is only the portion of your earnings that is taxable. Payments of interest on a mortgage and for business loans are just some of these expenses. Unfortunately, using a credit card for personal use means the interest you pay is considered nondeductible personal interest.
Personal Interest Explained
The goods and services that you do not use for work or business-related purposes is charge with an interest also commonly called as Personal Interest. Some of the most common examples is purchasing clothes, electronic equipment, and food using a credit card. Always remember that any monthly payments you make that include interest is considered as nondeductible interest. This also applies to subsidize the purchase of your home and using a credit card for doing so.
What is the deductible credit card interest?
The good news is there is an exception to the rule when using a credit card for business reasons. Most of the big companies around the country usually use a credit card when purchasing equipment necessary for their businesses, or in buying important supplies and other related business transactions. If you do this on your credit card, the payments you make to pay for the interest can be deductible and is considered the business expense. The number of your business earnings that is subject to tax for the payments of interests can, therefore, be reduced. Only interests from business-related purchases can be deducted if ever you happen to use the credit card for both business and personal reasons.
So when did the credit card interest deduction started?
It was the Tax Reform Act of 1986 that changed many provisions in the Code that the Internet Revenue of Services is following. It was the elimination of the personal interest deduction that really caught the attention of all taxpayers. Before the law was even implemented, all credit card interest payments can be deducted without any limitation when it comes to the purchases you make.
How can you avoid nondeductible credit card interest?
Usually, it is best to use a payment method other than credit cards if you want to claim an interest deduction. For example, try to look into student loans first instead of using a credit card in paying for your school tuition this semester. The IRS allows taxpayers to deduct interest payments made on student loan until its completed paid off. Many things have changed all throughout the years including the right for taxpayers to deduct interests on a home equity loan and provide cash in making personal purchases as well as deducting interests as part of your mortgage interest deduction. The home equity loans interests are no longer deductible starting 2018 unless it is used to buy, build, or significantly develop your home.
Few More Tips to Follow
Take note of fees and charges. You may be able to use annual free, ATM fees, foreign transaction fees, maintenance fees and many other bank and credit card fees as tax deductible. Although you still have to make sure they are used solely for business purposes only.
Research about other business deductions. If you’re self-employed, take advantage of your right to deduct a number of expenses that are not available for employe taxpayers. You can deduct mileage to and from work-related locations away from the home office as well as a portion of the home’s utility costs.
Any credit can be a business card. Make sure you understand this tip if you want to save some money when filing for your income tax. The credit card does have to be designated a business card by the issuer for it to be considered as a business account by the IRS. Any credit card can be considered a business card by the consumer to make sure you keep all the receipts in case the IRS decides to take a little closer to your claim and lastly, use the business card only for business expenses to really take advantage of all the deductions available.
If you’re still confused about the interest on credit cards and which of them are tax-deductible or not, consult a licensed tax professional to better understand what deductions you can qualify.
.
