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Is credit card interest tax-deductible?
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Is credit card interest tax-deductible?
Every self-employed individual is guilty of trying to maximize their tax write-offs. And they're not wrong to do so. If you have eligible business expenses, you should absolutely write them off. But that's not the only type of write-off you’ve got to choose from.
Did you know that credit card interest is tax-deductible? This might be the one (and probably only) time having unpaid interest can be a good thing. The IRS actually allows credit card interest to be written off – as long as it comes from purchases made for your business.
This is quite similar to mortgage interest, which you can write off a portion of if you work from home. It is very important that you only write off interest if it is related to your business, so make sure that you have the necessary records to prove it, in case the IRS ever has any questions.
Key takeaways:
- Credit card interest is tax-deductible if it comes from a business expense
- You can write off a portion of credit card interest from a personal card if it is also used for business purchases
Table of contents
When does a credit card interest payment become a tax deduction?
Thanks to the Tax Reform Act of 1986, you can no longer write off credit card interest for personal purchases. But the good news is that you can still write off that interest if it came from something you bought for your business.
But what if you don’t have a separate business card? Is credit card interest still tax deductible if it came from a personal card? Yes, as long as you only write off the portion of the interest that came from the business expenses.
Let’s use an example to break this down. Say you just started freelancing as a personal chef and spent $30,000 on a personal credit card last year, and you paid $2,500 in interest. You see that you spent $6,000 on business purchases like new kitchen utensils, ingredients and some ads you ran on social media.
So, 20% of expenses you made on that personal credit card were business-related. That means you can deduct 20% from your credit card interest. That's a $500 tax deduction!
If you're using a mixed-use credit card, it's easy to lose track of your expenses. By using FlyFin, you can let an A.I. tax engine do all the work for you and find every deduction you can use, just by linking your expenses. This can save you valuable time and money every tax season.
And that's not all. Our CPAs are available 24/7 on the app to answer any question you may have about 1099 taxes and can even prepare and file your tax returns for you.
How can you deduct credit card interest on taxes?
When filing your taxes as a self-employed individual, tax write-offs are your best bet for lowering your self-employment taxes. You can use a self-employment income tax calculator to get a detailed breakdown of your tax liability.
And apart from the main Form 1040 that every taxpayer will file, you will also need to file Schedule C. This is where you will record all your tax deductions, including credit card interest. It will go on Line 16 labeled “Interest” in box 16b labeled “Other.”
Self-employed individuals also have to make quarterly tax payments, the amount of which you can determine with a quarterly tax calculator. You only need to make this payment if you owe over $1,000 in tax for that calendar year.
Not everyone can pay their tax liability by the tax deadline. Use a tax penalty calculator to check whether you owe the IRS any penalty fees.
Credit card interest is not the only tax deductible a credit card can get you. We mentioned earlier that getting a credit card just for business use is a good idea if you want to keep track of your expenses easily. But that's not the only benefit it offers self-employed individuals.
Are any other types of interest tax-deductible?
Yes! The IRS is very specific about the categories of interest that are tax-deductible. You usually cannot deduct any kind of personal interest from your taxes, like interest from a car loan you bought for personal use.
Credit card interest can be useful when running a self-employed business. But if you’re using only one card for both personal and business use, make sure that you pay off your debt on time otherwise you might have a tough time separating the business interest from the personal.
If you pay your debt off on time, you only have to worry about the actual cost of the items you’re buying. And if you decide to use any tax refund you get from the IRS to pay it off, we promise we won’t tell anyone.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors. It offers a host of cutting-edge tax tools that help you quickly find deductions. You can also use tools like a home office deduction calculator.
FlyFin uses an A.I. to track all your business expenses automatically and find every possible tax deduction.
Once you have all your possible deductions in one place, our CPA team files a guaranteed 100% accurate tax return for you. It saves you a couple of thousand dollars and a ton of time on your taxes.
Download the app and have your taxes filed in minutes, saving time and more money on your taxes than last year, guaranteed.
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