If you dread tax filing season, you’re not alone. Many people dread this annual financial chore.
Getting back a nice chunk of change can ease some of the stress. One way to increase the size of your refund is to take every deduction you’re eligible for.
For example, if you have certain types of debt, the interest you pay may be good for a write-off.
That doesn’t mean that every type of interest is tax-deductible, however.
If you’ve got credit card debt, whether you can deduct the interest and fees depends on the type of card you have and what you’re using it for.
If you’re gearing up to file your taxes, here’s the skinny on how credit card-related tax deductions work.
Quick answer: On a personal credit card, fees and interest charges are not tax-deductible at all. On a business credit card, fees and interest charges may be tax-deductible.
Credit Card Interest: Not the Same as Mortgages or Student Loans
Owning a home comes with one nice perk: the interest you pay on your mortgage is generally tax-deductible.
The Internal Revenue Service (IRS) lets you deduct interest paid on first and second mortgages, up to the first $1 million in mortgage debt you owe.
The deduction is set is at $500,000 if you’re married and file a separate return.
A similar deduction applies to student loans. You can deduct up to $2,500 in interest paid on your loans. Whether or not you get to take the full deduction depends on your income for the year.
Either deduction can help put more money back in your pocket at tax time. Deductions reduce your taxable income.
The less taxable income you have, generally the less tax you pay.
If your income is right on the edge between two tax rates, an extra deduction for interest payments could swing you into a lower tax bracket.
Are credit card fees tax deductible for individuals?
The IRS also allows for deductions on other types of interest, including interest on money you borrow to purchase an investment property or interest incurred as a business expense.
Anything outside those deductions is considered personal interest. That includes the interest you pay on car loans, personal loans, back taxes, outstanding utility bills, and -- you guessed it -- credit cards.
That means if you’re using a credit card to cover travel or just pay for everyday expenses, you don’t get a tax break for the interest you pay.
You can’t deduct any interest if you use your card to help cover the purchase of a home or pay your college tuition bill.
You also can’t deduct any fees you pay for the card, including:
- Annual fees
- Late fees
- Overlimit fees
- Cash advance fees
- Balance transfer fees
You can thank the federal government for that. Prior to 1986, credit card interest payments were deductible, regardless of what you used the card for.
The Tax Reform Act of 1986 revamped the Internal Revenue Code and put an end to this particular write-off. There is, however, an exception to the rule for card members who qualify.
When Credit Card Interest and Fees Are Tax Deductible
If you own a business and you use a credit card to cover some or all of your expenses, you may be able to reduce your taxes.
If you own a sole proprietorship, a corporation or a limited liability company (LLC), you can take a deduction for credit card interest and fees on business-related purchases.
For example, let’s say you need to purchase office supplies for your business. You have a business credit card that pays you 5% cash back at office supply stores so you use it to pick up what you need.
It takes you three months to pay off the balance and in the meantime, you pay $50 in interest on those purchases. That interest would be deductible as a business expense.
Are credit card annual fees tax deductible?
Interest isn’t the only thing you can deduct either. If you’re wondering whether your credit card annual fee is tax deductible, you’re in luck.
That’s great if you’ve got a premium rewards card, like the Enhanced Business Platinum Card from American Express.
This card is suited for business travelers who like to take trips in comfort but it doesn’t come cheap. Fortunately, business owners can deduct the triple-digit annual fee.
If you slip up and pay your credit card bill past the due date, the late fee can also be deducted on your taxes.
Cash advance fees, balance transfer fees and foreign transaction fees also fall into the deductible category.
Are credit card transaction fees tax deductible?
The short answer is yes. There’s one other type of credit card fee you can deduct as a small business owner.
If your business accepts credit cards and your payment processor charges you a swipe fee, these fees would also be considered a business-related expense.
That deduction also applies to PayPal fees you pay for receiving payments for business sales.
What types of interest aren’t deductible for businesses?
While you can deduct credit card interest fees, there are other types of interest that aren’t deductible. This list includes:
- Interest paid on loans used for personal purposes
- Interest on debts your business doesn’t owe
- Interest on overdue taxes (Unless you operate as a C-corporation)
- Prepaid interest if you’re a cash basis taxpayer
- Interest paid on loans used to pay taxes or fund a retirement plan
- Interest on loans of more than $50,000 that you borrow against a life insurance policy
Choosing a Credit Card for Your Business
If you own a small business or you run a side business on top of your 9-to-5 gig, getting a credit card could be a smart tax move. The question is, which card should you choose?
There are a variety of business credit cards to choose from, all with different features and benefits. If you need to narrow down the field, it helps to ask the right questions.
For example, what do you primarily want the card for? Do you plan to use it to cover everyday expenses for the business? Is business travel a part of your plans? Or, do you plan to use it buy something big, like a pricey piece of equipment?
Next, think about how important earning rewards is. Then, compare that to what you think you’ll spend the most on.
If it’s travel, then a travel rewards business credit card is a no-brainer. If it’s office supplies or utility expenses, a different card is probably the better option.
You also have to consider the card’s annual percentage rate (APR) and fees. Even though these are tax-deductible, that doesn’t mean you shouldn’t be concerned with the cost.
That’s especially true if you’re scoping out rewards cards. The interest and fees you’re paying could make a dent in the value of the rewards you’re earning.
If you’ve got your eye on a specific card, gauge how likely you are to qualify.
Some business credit cards, for example, are designed for business owners with fair credit while others are geared towards people with excellent credit.
You don’t want to waste time applying for cards that may be out of reach.
The lender will check your personal credit score and credit history when you apply. It’s a good idea for you to check those things beforehand as well.
That way, you can narrow your search to cards that you’ve got the best shot at getting approved for.
Best Practices for Deducting Credit Card Interest
If you’re aiming to deduct credit card interest and fees, it pays to use the right approach. Here are tips for keeping your tax filing as stress-free as possible:
Don’t mix business and personal expenses
One mistake to avoid is using a business card for personal expenses. Only the interest for business-related expenses would be deductible.
If you’ve got business and personal expenses on the same card, you bear the burden of figuring out which interest charges apply to which purchases.
Keeping one card for your personal spending and one for business can reduce the hassle of tallying up the deductible interest and fees at the end of the year.
Keep good records
Good recordkeeping is vital when you’re deducting business-related expenses, or anything else for that matter.
The IRS expects you to hang on to receipts, credit card statements or other financial statements showing how much interest and fees you’ve paid.
If you end up getting audited, you’ll need this documentation to back up the deduction. Using tax apps or budgeting apps can help cut down on the paper trail.
Make sure you’re reporting interest and fee deductions properly
If you’re planning to deduct credit card interest and fees in connection with business expenses, you need to report them correctly on your tax return.
These expenses would need to be included on Schedule C of your Form 1040.
Being able to deduct credit card interest and fees is a nice perk of owning a business.
If, however, you only use credit cards for personal expenses, you’ll have to look elsewhere for deductions.
Taking advantage of things like the mortgage-interest deduction or the student loan interest deduction can help cut down on what you owe to Uncle Sam when tax season gets underway.