Tax Deductions for Married Couples and Credit Card Interest
Before 1986, taxpayers could deduct interest on any debt, including credit cards used to pay for vacations. Despite tax reform in 1986 to eliminate the credit card interest deduction, married couples still frequently deduct credit card interest. However, this is only possible if the couple owns a home or a business. Even then, certain variables can affect whether the couple can deduct credit card interest, such as the standard deduction for the year.
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Mortgage Interest Deduction
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The IRS allows married couples to deduct up to $100,000 in interest on credit obtained by using their home's equity. Taxpayers can deduct the balance on a second mortgage regardless of how it is used. Thus, paying a credit card with a home equity line of credit or loan makes it tax deductible. The limit is the same for single and joint filers; however, taxpayers filing as married but separated can only claim $50,000 in interest payments.
Business Deduction
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Married couples can pay for business expenses by putting items on credit and deducting the interest as a business expense. This is even better than a regular deduction because Schedule C business deductions reduce federal and payroll taxes. The IRS only allows taxpayers to deduct business credit card interest when they use the card for ordinary and necessary business expenses. This means a couple cannot put a vacation on credit and call it a deduction, but they can deduct, say, furniture for a home office.
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Record Keeping
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Keeping good records is critical to surviving an audit in case the IRS disputes your credit card interest deduction. You must prove to the IRS that your purchases were business-related because it is up to you the taxpayer to prove a deduction during an audit. Thus, many accountants suggest keeping a credit for which you only make business purchases, and one account for personal expenditures.
Tip
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It always pays to get the opinion of a licensed tax professional when taking a deduction for something with potential personal use, such as credit card interest. You also need to review the standard deduction. As a married couple, your standard deduction in 2010 was $11,400, which means you would need more than $11,400 in total itemized deductions if you plan on using home equity to pay your credit card and deduct the interest. Schedule C deductions have no income limit and are taken on top of the standard deduction.
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