In the United States, very few types of debt are tax deductible. Currently, only mortgages, student loans, and some types of business debts can be used as a tax deduction. In fact, only the interest on these loans is deductible, and it can only be deducted in many cases if the taxpayer itemizes. Because of these limited choices, converting credit card debt into tax deductible debt can be tricky.
Option 1: A Mortgage
If you are a homeowner with some equity in your property, you may want to consider converting your credit card debt into a home loan. In order for the loan to qualify for a tax deduction, the new mortgage must be against your primary residence. To do this, you will have to take out either a home equity loan, or completely refinance your property. In the first case, take out the HEL for the total amount of your credit card debt. In the second case, refinance the house for the amount of your credit card debt plus the remaining balance on your previous mortgage. Use the extra money to pay off your credit cards, then make payments on your new home loan.
Option 2: A Student Loan
If you’re a current student or about to enroll in a college, you might want to consider converting your credit card debt to student loan debt. Start by finding out the total estimated cost to attend your school. This amount usually includes expenses such as transportation and supplies. By law, you can take out student loans for the total amount of the estimated cost to attend the school, then request a check for the difference between what you use for your actual expenses, such as tuition. Use the surplus to pay off your credit cards. As a bonus, you may not have to make payments until after you graduate, and depending on your degree the loan may be all or partially forgiven.
Option 3: Convert to Business Debt
If you own a business, there are ways to convert personal credit card debt into business credit card debt. Doing this legally can be tricky, however, so be sure to consult with an accountant before doing this. In general, business owners can pay themselves a distribution from the business, then take out a loan for needed business supplies. As a business expense, the loan would be deductible from the taxes paid by the business. If you choose this method, be careful to compare interest rates, as interest rates offered to businesses are often higher than those offered to individuals.