ALBUQUERQUE, N.M. — Q: I have carried credit card balances of up to $30,000 over the past year and I don’t see any short-term solution to this issue. I have a house with a mortgage of about $127,000 that is worth more than $250,000. I now think that the smartest thing to do is to get a home equity loan and to use the money to pay off the credit cards. The interest rate will be lower, and I believe that I will be able to deduct the interest on the home equity loan, and that I currently cannot deduct the credit card interest. Can you confirm this for me?
A: The deductibility of interest depends on how it is classified. Personal interest is not deductible. Interest classified as business, investment, education, passive or residence may be deductible in whole or in part.
Interest is classified based on tracing the use of funds. So whether the credit card interest is deductible is based on what the borrowed funds were used for. Charges for business expenses, as one example, would create deductible interest.
However, if you use your credit card for the types of purchases that most people do, you are probably correct in concluding that none of the interest is tax deductible.