The Tax Facts About Credit Card Debt
You're allowed to take a tax deduction for some types of interest payments, but unfortunately, credit card interest is not among them. The tax code classifies the interest you pay on credit cards as "personal interest," a category that hasn't been deductible since the 1980s.
However, if you own a home, there is a way to convert non-deductible personal interest into a tax-deductible expense.
History of the personal interest deduction
Credit card interest and other forms of personal interest were deductible on income taxes some years ago, but Congress eliminated those deductions in the Tax Reform Act of 1986.
According to the Treasury Department, the personal interest deduction was seen as encouraging Americans to spend money rather than save it; in reality, it also reduced tax revenues. That's because money that people put in savings earned them interest, which was taxable income, but if they ran up credit card debt, they could deduct the interest from their income, which lowered their tax liability.
Tax-deductible interest payments
According to the IRS, only a few categories of interest payments are tax-deductible:
- Interest on home loans (including mortgages and home equity loans)
- Interest on outstanding student loans
- Interest on money borrowed to purchase investment property
- Interest as a business expense
All other interest is considered personal interest, which includes interest charged on credit cards, auto loans, unpaid utility bills and late payment or underpayment of federal, state and local income taxes.
