In the eternal search for tax breaks, interest paid on credit cards is not a reliable place to start. Credit card interest is only deductible on business-related purchases.
But let’s review the basics, so you know how to use your cards in a tax-smart way. If you have any questions, always consult a tax professional. What we’re offering here is only an overview and not to be used as tax advice.
What is the interest rate on a credit card?
Credit card interest is charged if you do not pay your balance in full before the due date of a billing cycle. The unpaid portion is carried over to the next billing cycle, and on your next bill, you’ll see your credit card issuer charging you interest on the unpaid balance.
The interest rates on credit cards vary widely, and many of them have different terms and conditions.
What is the difference between credit card interest and credit card fees?
Your credit card's interest rate is the amount you’re charged when you don’t pay your full balance before your due date.
Credit card fees typically refer to other charges, like annual fees, late fees, over-the-limit fees and cash advance fees. These are in addition to interest charges and can be significant, varying widely between card issuers.
Like interest charges, credit card fees are only tax deductible for businesses, not individuals.
Is credit card interest deductible on my taxes?
Credit card interest paid on business purchases is a legitimate tax deduction. Any fees charged on a credit card specifically identified as a business account can also be deducted.
But the same tax breaks aren’t available for personal credit cards or personal purchases made on a business account.
What are the tax implications of a card debt settlement?
If you’re unable to pay your credit card debt and you decide to work with a debt counselor, be mindful that the debt cleared in a settlement might be considered taxable income.
The IRS often sees forgiven debt as income, on which you might owe federal income taxes.
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How Bright can help
The best way to avoid tax confusion is to pay the full balance on your cards and avoid any interest charges.
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