Here’s what you need to know about credit cards and taxation:
1) Interest isn’t deductible – Unfortunately, credit card interest is lumped into the same category as car or personal loan interest and isn’t tax deductible. Home loan and student loan interest is tax deductible, however, which makes many people think credit card interest might be, too. Previously all interest was deductible, but the laws have since changed.
2) Rewards aren’t income – Credit card rewards that you get for spending money on your credit card are not income and are not taxed! This is one major benefit to using a credit card because whatever you receive in rewards does not have to be reported at tax time. Thus, rewards are significantly more valuable than the same amount of taxable pre-tax income.
3) You can pay your taxes with a credit card – If you so desire, a credit card can be used as a payment source to pay the IRS for any taxes due. Keep in mind that the payment processors that help the IRS do charge a convenience fee, which offsets the cost of processing your payment. The fee, however, is relatively small on small tax payments.
4) Credit cards can be used for proof of purchase – Business credit cards work as an organized “receipt” for business expenses. If you keep your accounts separate and have an account just for work related expenses, your tax time preparation will be made easier with the previous 12 months of credit card statements.