Are Credit Card Rewards Taxable?
You’ve had a banner year in the credit card rewards department. By implementing a sound rewards-earning strategy, you’ve managed to acquire a cache of cash back rewards, points, and even travel miles. But, as April and the tax-filing deadline approach, you have the thought, Do I have to declare all those credit card rewards I racked up? Does the IRS consider them taxable income?
Sounds like an easy question, right? But, like most things associated with taxes and tax codes, the answer isn’t as straightforward as you might think. Whether or not credit card rewards are taxable typically comes down to two considerations: (1) Whether your credit card is being used for personal or business purchases and (2) How you’re acquiring credit card rewards.
Are Credit Card Rewards Considered Income?
The good news is that the Internal Revenue Service does not consider the vast majority of credit card rewards received by taxpayers to be income. Because a cardholder typically has to use their rewards credit card to purchase eligible items in order to receive rewards, the IRS considers the vast majority of credit card rewards to be rebates or discounts on your purchases, not income. That means if a consumer earns $1,000 in cash back rewards over the course of a year, they do not need to declare that thousand bucks as income on their tax return. The same holds true if they earn $1,000 worth of points or travel miles or any other type of credit card rewards awarded to consumers.
In case you haven’t guessed yet from the two italicized consumer references, things change when credit cards are used for business purposes.
Are the Rules Different for Credit Card Rewards Earned for Business Purchases?
If you have a dedicated rewards credit card for your business—or even if you occasionally use your personal rewards card for business purposes—rewards earned on deductible business expenses are not considered discounts or rebates by the IRS and must be subtracted from the total cost of any business expense being deducted.
Let’s say you purchase a $1,000 deductible business expense with your 3% cash back rewards credit card, and it earns you a $30 statement credit. The IRS expects you to subtract that $30 credit from that deduction, making your total deduction $970 instead of $1,000. Again, the same would hold true for any points or miles you received for that deductible business purchase. The cash value of those points or miles should be subtracted from the deduction.
The credit card rewards you receive effectively reduce the amount you actually spend running your business, so the reduced amount (cost minus the value of any rewards received) is the deduction you should take.
Are There Other Exceptions to When Credit Cards Rewards Are Taxable?
You didn’t really think determining when credit card rewards are taxable would be as simple as consumer vs business purchases, did you? We’re talking about a complicated tax code that supports nearly 63,000 individuals who make (or partially make) a living preparing returns for individuals and small businesses. Of course there are more exceptions!
Here are three of the more common exceptions for consumers:
Sign-Up Bonuses: If your rewards credit card offers bonus rewards just for being approved for their credit card, these rewards may, in fact, be taxable.
So, say you are awarded 30,000 bonus travel miles valued at $300 just for being approved for the card. You are not required to make a designated amount of eligible purchases within a specified time period or do anything else to receive this bonus. In this case, those rewards would typically be taxable because you were not required to do anything to get them other than be approved for the card. So, technically, they’re not a discount or rebate.
However, if you’re required to make $X worth of eligible purchases with the card within a designated time period to receive the bonus miles—say, $3,000 within the first three months—then you are technically receiving a discount or rebate on that $3,000 worth of purchases. In this case, the bonus rewards would likely not be taxable.
- Refer-a-Friend Rewards: Let’s say your points rewards credit card issuer has a referral program where you get 60,000 points for referring someone you know to receive the same card, and the card issuer approves them. Well, in this case, you’re essentially performing a service for the credit card issuer, and they are paying you with points. You’re not receiving a discount or rebate for purchases made with the rewards card. In this case, if each point is valued at one cent, the miles you received would be valued at $600 and would likely be considered taxable income.
- Rewards Earned Purchasing Cash Equivalents: This exception is kind of complicated and doesn’t apply to most people, but it basically boils down to using rewards credit cards to purchase things like money orders or prepaid debit cards or other “cash equivalents” for the express purpose of earning credit card rewards. According to Forbes, a new U.S. Tax Court ruling found that these types of rewards could, in fact, be taxable.
Will My Credit Card Issuer Let Me Know if My Rewards are Taxable?
Your credit card issuer has no way of knowing which, if any, purchases that earned you rewards are being deducted as business expenses. So, it’s up to you to keep accurate records and subtract the value of any rewards earned for these purchases from business deductions you take.
If you receive over $600 worth of taxable rewards from sign-up bonuses or referral programs, then the card issuer is required to report that income to the IRS, and they should send you a 1099-MISC form, which will show the dollar amount you need to declare on your tax return.
How Can I Know for Sure if My Credit Card Rewards are Taxable?
For the vast majority of consumers, the credit card rewards they receive for making eligible purchases with rewards credit cards are not taxable and do not need to be declared. However, if any of the exceptions above apply to your situation, you should contact a qualified tax advisor, attorney, or financial advisor for professional guidance.
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