Are Credit Card Rewards Taxable?

Many lenders offer credit card rewards as an incentive to attract customers. These bonus goodies come in the form of cash, account credits, airline “miles”, and much more. Previously, only the most exclusive credit cards offered rewards, but now almost every major card offers some form of bonus program. Getting rewarded for spending is a nice perk, however, some consumers are starting to wonder about the tax impact of their rewards.

Do Rewards Count as Income?

The determining factor in establishing if credit card rewards are taxable is whether or not your rewards are considered income. As you are probably aware, the IRS wants all income reported so it can be taxed accordingly. When it comes to credit card rewards, the income factor will depend on the type of reward you receive. A cash-back reward may be viewed differently than a travel reward.

Click here to see official IRS guidance on credit card rewards.

Cash-Back

If you receive a cash-back reward in the form of cash paid directly to you, this could be considered income, and therefore taxable. However, if you elect to take the cash-back in the form of an account credit it is generally considered a rebate and not considered income.

Travel & Gifts

Travel rewards and accumulated points you can use to purchase gifts are viewed as a rebate as well if you are spending your own money to earn them. This is viewed as simply getting a discount on your purchases. However, if they come in the form of a huge sign-on bonus they may be considered income. Some credit card companies offer a massive bonus just for signing up. In this case, if you receive the bonus without actually spending the money it could be viewed as income by the IRS.

When it comes to “income” earned from credit card rewards programs, one thing to consider is if you received a 1099 MISC. A 1099 MISC is issued whenever the payor pays more than $600 to the payee. In this case, you receive a 1099 MISC for your credit card rewards, you must report the income. Issuers of 1099’s are also required to send a copy of the 1099 MISC to the IRS. Failing to accurately report the income could raise a red flag with the IRS.

Credit Card Rewards Taxes

Cardholders generally receive rewards for personal purchases, so they’re treated as rebates unless you receive a cash bonus. The IRS generally doesn’t count personal credit card rewards as income. Most reward programs only offer 1% to 2% cash-back so, in most cases, they don’t amount to much anyway.

Business Credit Cards

On the other hand, business credit card rewards can affect your taxes. If you’re using your card for deductible purchase, cash rebates could affect your expense totals. Rebates on deductible expenses are subtracted from your deduction expense because the credit card company gave you back the money. As a result, claiming credit card rewards on deductible expenses could raise your taxable income.

For example, you attend a business conference and use 200 airline miles to discount your Without the discount, the tickets would cost $1,000, but after the rebate, you pay only $800. However, you can only claim $800 as a deductible travel expense. Instead, it might be better to pay full price and use your miles to fund a personal trip. That way, you get your rewards and there’s no impact on your deductions.

Tax Planning for Credit Card Rewards

If you have earned a lot of points using your credit cards over the tax year and want to minimize your tax liability, it is important to pay attention to the fine print. Some credit cards offer cash bonuses as incentives, and these could qualify these as income. However, if you have to spend money to earn the bonus, it’s typically viewed as a rebate. Rebates don’t count as income so they don’t usually affect your tax profile.

However, rebates can count against your deductions. If you want to maximize deductions, you should use your rebates wisely. If you take your rebates for a tax-deductible purchase, they will reduce your overall deduction totals. Make sure you’re taking your rebates in a way that doesn’t have a negative impact on your tax profile. Timing purchases and rebates strategically can help lower your tax liabilities, but you should speak to a tax advisor for more detailed advice.