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When you think about your credit cards, you probably don’t think about taxes. However, there can be some tax implications when it comes to your credit cards. For some of us, the way that we use our credit cards could add to the amount that we’re able to deduct from your tax return. For others, credit cards may increase your yearly income and cause a tax debt. You may not realize this fact until you receive a tax form for your credit card in the mail.
There are some interest deductions that you’re able to take off of your taxes. Interest on your mortgage, student loans, and similar debts may be written off depending on if it’s eligible. However, in most circumstances you can’t write off the interest you pay on your credit card. In the past, you were able to deduct personal interest. That deduction changed with the Tax Reform Act of 1986.
There’s one way that you’re able to write off interest, and that’s if you use your credit card for your business. One of the key caveats with this deduction is that if your credit card has both personal and business expenses on it, you can only deduct the interest related to the business expenses.
There are many reasons why people decide to sign up for a credit card. One of the big reasons people choose to get one is the perks that it offers them. These rewards make it worthwhile to get the card. They provide an incentive that makes you want to use the card, such as a percentage back on your purchases or a bonus when you complete certain activities when you sign up. One thing that people may not realize is that there can be tax implications on these rewards.
If your purchases are earning you a specific percentage reward, the IRS views this as a discount rather than income depending on the way your credit card agreement is written up. That distinction means that you’re safe from having to pay taxes on this type of reward.
However, if you received a check or statement credit, that is another story. The IRS views this as taxable income. This distinction means that you’re responsible for reporting this on your tax forms. The good news is that your credit card company will include a disclosure with your reward card that will note if they may report any rewards you receive as income to the IRS.
Other types of rewards aren’t safe from potentially being taxed. Things like travel rewards may also fall under the taxable category. That means that you’d be taxed on the amount of money the award would be worth if you paid for it out of pocket rather than through a reward program.
You may be wondering how you’ll know if you have to report this money on your tax forms. If the credit card company sends you a 1099-MISC form, they reported it to the IRS. If they didn’t send one, they more than likely didn’t report it.
Business purchases are a bit different when it comes to credit card rewards since you can deduct the interest from your taxes. Say you make a business purchase that results in a credit card rebate. This rebate isn’t considered income but can reduce the amount of the deduction you can take for that business expense.
Say you use your personal credit card to pick up something for work that is later reimbursed by your employer. Don’t worry that this will be considered income; it’s not, as of the current tax laws. The IRS will not come after you for not reporting this as income since you’re paying for something for your business with no financial incentive for you to do so.
One tax form that you may not be expecting or even know about is the 1099-C form that credit card companies can issue. These forms are sent out when part of your credit card debt is forgiven. There are occasions when people that have fallen on hard times get a discount if they pay a certain amount, and the credit card company writes off the remaining balance. It appears to be a win for everyone involved in that the person struggling is free of the debt while the credit card company doesn’t have to try to continue using resources to collect the debt.
This write-off for the credit card company isn’t a write-off for you, though. It’s considered income by the IRS. That means that you’ll be paying taxes on this money that was shaved off your bill, often making this an even harder situation to deal with over time. The sad thing is that credit card companies aren’t currently required to disclose this information to someone if they offer a reduced payoff amount. That means it could come as a big surprise months after taking the offer.
You’re required to include it in your tax filing, and not doing so can result in being audited, penalties, and even fines. Before going through the process of accepting a credit card offer, you should discuss the tax implications with a tax professional. Depending on how much is being written off, you may find yourself having to pay more in taxes than you saved with the offer, especially in a case where it puts you in a higher tax bracket.
Credit cards can be a blessing and a curse. You may find that you’re one of the lucky individuals that get to deduct your business purchase interest from them. You may also discover that you’re on the other end of the stick with tax implications that you weren’t expecting. Are you ready to look for ways to handle your credit card debt? Solvable is here to help with our debt relief education services. We partner with companies to help you manage your debt in a manner that allows you to move forward. Contact us today to learn more about getting assistance.