The interest charges that rack up if you don’t pay your credit card bill off each month are considered “personal interest,” which isn’t deductible from income tax returns. But you may be able to write off interest you paid on business expenses charged to your card.
You may have run up hundreds or thousands of dollars in credit card interest charges in 2019, but don’t expect any relief from Uncle Sam as the new tax season rolls around.
Generally, the interest charges that rack up if you don’t pay your credit card bill off each month are considered “personal interest,” which hasn’t been deductible from income tax returns for more than three decades.
Before that time, any credit card interest you paid could be a tax write-off. But that deduction was eliminated when Congress passed the Tax Reform Act of 1986.
“There are not a lot of deductions for things considered personal items,” says Russell Schneidewind, lead tax research analyst for H&R Block’s Tax Institute.
However, it’s a different story in terms of credit card interest write-offs if you’re part of the gig economy or you’re self-employed.
And there are moves you can make this year to help reduce your credit card interest payments going forward.
See related: 3 credit card questions to ask yourself in 2020
Can you write off credit card interest?
If you drive for Uber, work as a freelance web designer, consult other businesses or even pet sit, and you charge business expenses to your credit card, any interest that accrues can be a write-off on your tax return.
An estimated 57 million workers, or 35% of the U.S. workforce, freelanced in 2019, according to a poll by Upwork and the Freelancers Union. Freelancing income totaled almost $1 trillion.
It’s best to get a separate credit card for your business expenses so “all interest on that card is deducted as a business expense” says April Walker, lead manager of tax practice and ethics at the Association of International Certified Professional Accountants.
But it’s not mandatory that you get a business credit card in order to deduct the interest you accrue. If you have a personal credit card you don’t use, you can set that aside for business expenses, Walker says.
If you mix both your business and personal expenses together on one card, you can still deduct the interest from your business expenses. But you’ll need to calculate what percentage of your purchases went toward your business, and then deduct that percentage of your credit card interest from your tax return, Schneidewind says.
“It can get messy trying to keep track of what’s what if you are mingling business and personal expenses” cautions Thomas Nitzsche, spokesman for Money Management International, a nonprofit consumer credit counseling service.
But if you have a steady gig or are self-employed and want to get a business credit card, you typically need to give a personal guarantee, says Emanuel Rivero, head of Money Management International’s small business counseling services.
However, if you have a business credit card and have a good payment record and your business grows, “it can open doors for funding that doesn’t require a personal guarantee,” he says.
A business card “can also offer some great reward and point programs for travel or cash back,” Rivero says.
What other kinds of interest can you deduct?
HELOCs and home equity loans
Until recently, your home also could provide a way for you to deduct credit card interest and reduce the interest rate. As of Jan. 8, the average interest rate on a new credit card was 17.30% APR, according to CreditCards.com.
If you had a home-equity loan or home equity line of credit (HELOC), you could ring up charges to your credit card, then pay the card off using the HELOC or home equity loan. Home equity loans generally carry much lower interest rates than credit cards.
Interest on HELOCs and home equity loans had been tax-deductible, regardless of what the home equity loans were used for, says Lisa Greene-Lewis, a CPA and tax expert at TurboTax.
But Congress changed those regulations in the Tax Cuts and Jobs Act of 2017. With tax reform, “interest has to be related to the building or improving of your principal residence,” before you can write it off, Greene-Lewis says. The change took effect starting in the 2018 tax year.
Paying your credit card debt with a home-equity loan can still reduce your interest rate. As of Feb. 13, the average home equity loan rate was 7.12% APR, according to Bankrate.com.
But you may end up paying that interest for a longer period of time, and that could wind up costing you more than if you hadn’t transferred the debt to a home-equity loan, Nitzsche cautions.
Homeowners can continue to deduct the interest paid on their mortgages. Under the 2017 tax law, if you bought a house after Dec. 15, 2017, you can deduct the interest on the first $750,000 of your mortgage, Greene-Lewis says. If you purchased a home prior to that date, you can deduct mortgage interest on the first $1 million of your mortgage.
You can also deduct up to $2,500 in student loan interest. You can deduct the full amount if you earned less than $70,000 as a single filer, and a reduced amount if you earned up to $85,000 last year. For married taxpayers, you could take the full deduction if you earned less than $140,000, and a reduced deduction if you earned up to $170,000.
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How to reduce your credit card interest in 2020
There are ways you can reduce your credit card interest this year, including transferring a balance to a card with a 0% promotional APR.
“The hardest part is being able to qualify,” said Greenpath credit counselor Jeff Arevalo, because you usually need to have a solid credit score.
With a balance transfer, you transfer your credit card balances from a card with a higher interest rate to one with a 0% APR for a set period of time, such as 12 or 15 months.
But you’ll most likely have to pay a balance transfer fee, which is generally 3% to 5% of the balance transferred. And if you don’t pay the balance off within the set period of time, the interest rate will climb. The average minimum APR for balance transfer cards is 15.45% as of Feb. 12, 2020, according to the CreditCards.com Weekly Credit Card Rate Report.
You need to be sure “your budget is healthy enough to pay down the debt within the introductory period,” Arevalo says.
Applying for a new credit card also can affect your credit score, particularly if you apply for several cards within a short period of time, he says.
See related: Best balance transfer cards with no transfer fee
Another option to reduce interest is to take out an unsecured personal loan. If the personal loan limit is high enough, it could provide a way for you to roll all your credit card debt into one loan, which carries a fixed rate for a certain amount of time, Nitzsche says.
As of the third quarter of 2019, the average interest rate for a 24-month personal loan was 10.07%, according to the Federal Reserve.
But you need to be careful to not continue to use your credit cards, running up even more debt, Nitzsche says. Otherwise, you could wind up with both personal loan and credit card payments due.
Your debt also could balloon if you’re not careful.
“With personal loans, we often see clients who previously took out the loan to consolidate credit card debt but didn’t address their reliance on credit cards. They then end up with both credit card and loan payments,” Nitzsche says.
Correction: An earlier version of this story incorrectly identified Greenpath credit counselor Jeff Arevalo.