At tax time, when you're preparing to file your tax return, you need to have any documents on hand that can help track your income and expenses. Since you are likely using a credit card for many purchases throughout the year, the annual summary from your credit card can help you see many of those expenses in one place. It's free and easy to use.
Finding Your Credit Card Summary
If you still receive paper bills from your card issuers, expect to find an annual summary in your mailbox before the year's end from your card or rewards credit card. If you use electronic statements, just log into your account and search your statements for the annual summary. For some credit cards, you must be enrolled in paperless statements to view statements online.
Video of the Day
The annual report might not be available until the end of your last billing cycle of the year. If you want to get organized and prepared for income taxes before then, just save or print out your monthly statements and get a head start with those.
The summary will give you an overall snapshot of your credit card account, including your credit limit, total credit card payments for the year, interest paid and any cashback you earned throughout the year.
The IRS has a web page devoted to credits and deductions.
How It Helps With Deductions
For individuals, using an annual credit card summary at tax time isn't because you get a tax break for credit card debt, payments or interest. It's because it helps you see your expenses clearly and track which ones are deductible.
The year-end summary statement will show your total annual expenditures for that card account, broken down by general categories:
- grocery and drug stores
- travel: airfare, lodging, car rental
- monthly bills: utilities, phone, internet, cable
- services: professional, healthcare, insurance
The summary will show a total, most likely include some graphs and then offer a detailed report of the expenses in each category that may reduce your taxable income. Here, you can start to get a clear picture of which expenses you charged might be tax-deductible.
More for your information, the credit card summary may also include your credit score at year's end. You won't need this for your taxes, but you may want to download free copies of your annual credit report from the three major credit bureaus to add to the overall financial picture you are painting for yourself.
Consider also: How to Check Credit Card Purchases
Debit Card Annual Summary
With most debit cards, you can also get an annual summary of your debit card activity or spending analysis, broken down in similar ways. You can retrieve it in the same way, by going to your bank's website and downloading a copy or requesting a paper copy, if that is your preference. This is also a good time to download a summary from your bank account.
Consider also: How to Do a Credit Card Tracking Spreadsheet
Deductible Spending Categories
Once you have the breakdown from the year-end summary in front of you, you can start identifying expenses eligible for deduction on your federal taxes. If you regularly use your credit card for certain expenses, you'll be able to track them easily at tax preparation time. Qualifying expenses can vary:
- childcare or daycare
- medical expenses
- property taxes
- charitable contributions
- real estate expenses
- state taxes
- certain education payments
Let the IRS be your guide for this. They have a web page devoted to credits and deductions. If you are getting assistance from a CPA or other tax preparation professional, you can confirm the eligibility of any deductions.
Consider also: Use Your Online Order History at Tax Time
Keep Your Receipts
If you have expenses you'll be deducting, your credit card statement will prove how you paid for the item or service. But if you ever get audited, the IRS will be looking for a receipt, too.
If it's a regularly-occurring payment, such as childcare tuition, the facility will often provide you a year-end expense summary because it is common to deduct this expense. If you are itemizing medical bills paid for with your credit card, you can often download the original invoice.
Bottom line, the main idea is to back up the credit card statement with a receipt, so the IRS has the proof they need to confirm it. Keep these documents for seven years for that reason.
Consider also: How to Preserve Store Receipts