HEY, WANT TO USE OUR SCISSORS TO CUT UP THE CREDIT CARDS?
This time of year, for us at Abo and Company / Abo Cipolla Financial Forensics, we're at the intersection of taxes and marital/businesses divorces. So, here's a topic that's been coming up a lot lately. Credit card debt. Many people are in the habit of using their credit card to make major purchases, finance their happy (or unhappy) households, fund lifestyles, make tuition payments, pay for orthodontics...you name it. They then only make the minimum payment on the outstanding debt (as required by the card issuer). Unfortunately, they never figure out what it will cost to really pay off the debt. This is only worsened by what we're left to alert tax clients this time of the year that, for the most part, such interest expense is not even deductible making the after-tax cost hurt even more. Oh yeh, in the past we, or other astute CPAs, may have counseled you to consider a home equity loan to pay off such personal debt and convert such to a deduction for home equity interest. Well, effective January 1, 2018, under the new tax law, that maneuver won't work to make for an interest deduction.
Assume Jane has a $5,000 balance outstanding and that the interest rate is 18% and, as with many cards, the minimum payment is $100 the first month and 2% of the outstanding balance or $10, whichever is greater. Thereafter, it will take 46 years to pay off the debt, and the total cost will be $18,926, which includes $13,926 in interest that is not tax deductible. Looked at another way, assume part of the debt was incurred for the purchase of a Louis Viton pocketbook costing $1,000. Using the same interest rates and payment arrangement as in the previous example, it would take 19 years to pay off the pocketbook, and the final cost would be $2,899 which includes $1,899 of non-deductible interest.
It's not surprising that credit card companies urge you to only make the minimum payment each month. We like to remind clients that credit card balances be paid in their entirety each month, and that other means be used for borrowing. Even when we are preparing tax returns, involved in structuring marital/business dissolutions or providing personal tax and financial planning assistance, one area we try to examine is personal debt - trying to determine that the least costly and most tax efficient means of borrowing are utilized.