INTERNAL REVENUE SERVICE

Internal Revenue Service: Scenario Analysis

Internal Revenue Service: Scenario Analysis

Answer of Question 1

Non-deductible Personal Interest

Credit card finance charges fall in the non-deductible personal interest category according to the IRS tax code; therefore, you cannot deduct finance charges you incur on your credit cards. The IRS defines personal interest as any interest that is not home mortgage interest, business interest or investment interest. IRS instructions list personal interest as interest on car loans -- unless you use the vehicle for business purposes; interest you pay on federal, state or local income taxes; finance charges on credit cards, retail installment accounts and revolving charge accounts used for personal expenses; and late payment fees charged by a public utility that you paid (Internal Revenue Service, 2010).

Student Loan Interest

The exception to the non-deductible personal interest definition is the interest paid during the tax year on a qualified student loan. The loan acquired for the purpose of education (qualified) is categorized as student loan (qualified) by IRS rules; a loan that is paid within a reasonable period of time. The IRS lists qualified education expense as fees, room, tuition and equipment, supplies, books, board, and any supplementary expenses.

Other Non-deductible Fees

You cannot deduct many other fees associated with credit. IRS regulations explain that service charges, annual credit card fees, fees associated with procuring a loan, credit investigation fees and the interest charged to purchase or carry tax-exempt securities fall in the non-deductible fees category.

Answer of Question 2

If the property transferred is used for the production of income or in the ordinary course of income, then it is deductible as a miscellaneous deduction on Schedule A. IRC § 212; Reg. §1.212-1(d).  However, if the property is held entirely for investment purposes, then the deduction is limited by any income generated from the investment [IRC § 163(d)]. This ...