12/21/2022
When tax season arrives, we all want to include as many expenses as possible so that the government will reward us for our contributions.
Taxes are not a simple subject and you have to know the rules well or be a dedicated accountant. For now, we will try to find out if credit card fees and interests are deductible.
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Is it possible to deduct credit card fees from taxes?
Although credit cards are very good at giving you different benefits, such as rewards, bonuses, insurance, protections and more, they also include some rather undesirable fees and charges.
To the question that concerns us, the simple answer is no. We will explain below the legal reasons why individual credit cards expenses are not considered tax-deductible.
However, those who have their own business, are self-employed or contractors, can deduct certain fees on expenses related to the business activity they do.
While this is possible using any credit card, our main suggestion is that you do not mix personal expenses with those related to a business venture.
Why can't personal expenses on a credit card be deducted?
To answer this, we need to back up a bit and review the Tax Reform Act of 1986. In this text, the government eliminated the ability to deduct interest on credit cards and other installment financing at IRS filing time.
This also means that you also cannot deduct charges for personal loans, medical expenses and more.
Similarly, the TCJA or Tax Cuts and Jobs Act, which went into effect in 2018, establishes a regulation that complements the previous text.
Individuals no longer have the possibility to itemize certain deductions as in previous years. Among the changes of this statute, individual expenses for businesses, such as vehicular costs, cannot be eliminated either.
Deductible fees for businesses
Since individual credit card expenses are not deductible, we must pay attention to those that are.
If you own a business, the IRS indicates that business expenses qualified as "necessary" or "ordinary" can be deducted from taxes. Within this category, businesses have a number of expenses that fit this description.
For example, if you plan to set up points of sale to start receiving cards, processing these types of payments involves having an agreement with a bank or credit card issuer.
Every time you swipe a credit card, enter it into the system or someone makes an online purchase, you are charged a percentage. According to the IRS, these charges can be deducted from taxable income.
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Small business owners have the greatest opportunity to reduce their taxes. If you are self-employed, a contractor or run a business, you may receive discounts based on annual commissions, late fees or other fees imposed by credit card issuers. Since these are routine expenses to operate as a business, they are eligible for deductions.
Business deductions are compiled in detail in Internal Revenue Service (IRS) Publication 535. According to this text, businesses large or small can deduct almost any expense related to their operations throughout the year. This applies when they are calculating their total annual tax bill.
When it comes to using a credit card, businesses can deduct: annual or monthly fees, finance charges and late fees, among others.
The important thing is that the charges are business related. In addition, companies can deduct any credit or debit card payments when filing taxes.
Other interest that may be tax-deductible
While interest generated by individual purchases on a credit card may not be deductible, there are other charges that are:
- Mortgage Loans. Homeowners can deduct interest on up to $750,000 of mortgage loans on their principal residence.
- Business credit. Business owners can also deduct interest on any small financing considered a business expense.
- Student loans. If you have paid interest on this type of financing, you can deduct up to $2,500 of the amount paid as an adjustment to your gross income.
- Investment property. Homeowners can deduct taxes on ordinary or necessary expenses of a rental property, including mortgage interest.
The tax issue is complex, extensive and requires specialized advice. For now, you can be certain about what you can and cannot deduct when you use a credit card for personal or business expenses.
If you want to know more about IRS regulations, you can consult our specialists. And if you are looking for the best banking products, you can also use the Busconómico comparator.
Español: ¿Pueden deducirse las comisiones de las tarjetas de crédito?