One common tax myth is the belief that you can deduct credit card interest. This misconception can lead to incorrect deductions and potential issues with the IRS. Here's what you need to know to stay compliant and avoid these pitfalls.

Origin of the Myth

• Misunderstanding of Interest Deductions: Many people assume that all interest expenses, including those from credit cards, are deductible.

• Lack of Awareness: There is often confusion about the specific criteria for deducting interest expenses.

Reality of Deducting Credit Card Interest

• Personal Expenses: The IRS generally considers credit card interest incurred for personal expenses as non-deductible.

• Business Expenses: If credit card debt is used exclusively for business purposes, the interest on that debt may be deductible.

IRS Guidelines on Credit Card Interest Deductions

• Non-Deductible Personal Interest: Interest on personal credit card debt, such as for personal purchases or household expenses, is not deductible.

• Deductible Business Interest:

• Business Purpose: Interest on credit card debt used solely for business-related purchases or expenses is deductible as a business expense.

• Proper Documentation: Maintain clear records showing that the credit card debt was incurred for business purposes.

Why the Myth Persists

• General Misconceptions: Many taxpayers believe that all interest expenses are deductible, regardless of their purpose.

• Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.

Avoiding the Pitfall

• Understand the Rules: Clearly understand the IRS rules for deducting interest expenses.

• Non-Deductible: Personal credit card interest.

• Deductible: Business credit card interest, provided the debt is used exclusively for business purposes.

What You Can Deduct

• Business Credit Card Interest: Document interest expenses on credit card debt used solely for business activities.

• Interest Allocation: If a credit card is used for both personal and business purposes, only the interest attributable to business purchases is deductible.

What You Need to Do

• Keep Detailed Records: Maintain accurate records of credit card statements, receipts, and documentation showing that the debt was incurred for business purposes.

• Separate Business and Personal Expenses: Use separate credit cards for personal and business expenses to simplify record-keeping and ensure proper deductions.

Consulting a Tax Professional

• Seek Professional Advice: Consulting a tax professional can ensure you correctly identify and claim eligible interest deductions.

• Accurate Records: A professional can help you maintain proper documentation and navigate the complexities of deducting credit card interest.