Are my credit card rewards taxable?

Do you love earning credit card rewards? From cash back to travel rewards, credit card rewards can help you enjoy the things you love for less. Come tax season, however, you may be wondering if you owe any taxes on the rewards you’ve earned.

So, how does the IRS treat credit card rewards for tax purposes? For most people, filing tax returns is about as enticing as a trip to the dentist — which means this may be a “taxing” question for you even after the tax filing deadline. In this piece, we explore whether credit card rewards are taxable and provide tips on how to ensure you don’t owe taxes on your credit card rewards.

When credit card rewards are not taxable

In most cases, credit card rewards are not taxable — which means you won’t owe any surprise taxes on the rewards you’ve earned. When credit card issuers offer rewards for making purchases, the IRS considers the rewards to be a form of rebate on the purchases. Thus, the cost of the purchase is reduced and the rewards are not considered taxable income.

This is akin to a store offering you a $10 mail-in rebate after you purchase a $100 toaster. The rebate is not considered income to you — it just helps make the product more affordable and drives sales for the business.

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When credit card rewards are taxable

Although the IRS usually considers credit card rewards to be nontaxable, there are certain situations in which you may owe tax on your rewards. Here are some examples of when credit card rewards may be considered taxable.

Airline rewards could be taxable

When airline miles or points are awarded on the basis of a purchase, those rewards still enjoy the tax exemption. If bonus points or miles are awarded merely for opening a credit card, however, the taxability of those rewards will change. The IRS no longer considers the rewards to be a rebate since no purchase was required to qualify for the rewards. That means you may have to pay taxes on the value of the rewards.

For example, let’s assume you are given airline miles simply for opening up a new credit card, and receiving those miles isn’t contingent on any type of purchase. Because no purchase was required, those miles are likely taxable.

As another example, let’s suppose you use your personal Delta SkyMiles® Platinum American Express Card to purchase flights for a work trip. You earn 3X miles on the purchase and are later reimbursed for the cost of the flights by your employer. In this instance, the IRS could potentially consider the miles as a form of employee compensation, making them taxable. However, the IRS has not shown a willingness to enforce or pursue this in the past.

Welcome bonuses could be taxable

Most credit card welcome bonuses are not considered taxable income because you must meet a minimum spending requirement to earn the bonus. For example, the Wells Fargo Active Cash® Card currently comes with a welcome offer of $200 in cash back rewards. To earn the bonus, however, you need to make $500 in purchases within the first 3 months you have the card. This type of welcome bonus would not be considered taxable since a purchase is required to earn the bonus.

On the other hand, there are situations in which a welcome bonus may become taxable. Occasionally, an issuer may offer you bonus rewards for simply opening an account (or for other reasons). If no purchase or minimum spending amount is required to qualify for the rewards, the value of those rewards then becomes taxable.

Credit card referrals could be taxable

The same principle applies to certain credit card referrals. If you receive a cash reward when you refer someone to sign up for a new card, this is technically considered taxable income.

Scott Hallberg, senior tax director at Calibre CPA Group, explains in an online post that — in the event that unearned bonus points or miles awarded to you are worth $600 or more — the IRS requires the issuer to report this as income and send you a 1099-MISC form. The credit card company is responsible for determining the value of the bonus rewards, which can be found somewhere in the fine print of the disclosures it sent you.

How credit card rewards are taxed

Unless you are racking up an enormous amount of rewards that don’t require a purchase, odds are you won’t owe any taxes. It doesn’t matter if your rewards come in the form of cash back, miles or points — as long as you meet a spending requirement to get there, you are in the clear. Remember, it doesn’t matter how much you are earning in rewards. It matters how you got there.

Tread carefully when you come across credit cards that offer a bonus without a spending requirement — or rewards that are offered for new cardholder referrals. This is where things can get complicated. These “no strings attached” offers may seem like freebies, but they are likely considered taxable.

Welcome offers that hand out sums of money (or rewards) without a spending requirement aren’t very common, but they are out there. The same goes for referrals. If you are offered money in exchange for referring someone to open up a new card, you are technically required to count these types of exchanges as income. If the value of such unearned payouts is above $600, the IRS requires the card issuer to send you a 1099-MISC tax form, which you should report on your tax return.

How to avoid taxes on your rewards credit card

Most credit card rewards (no matter what form they may come in) are not taxable in the eyes of the IRS. They see these types of transactions as discounts, not taxable income. As long as you’re benefiting from credit card offers that allow you to earn rewards or a welcome bonus when you meet certain purchase requirements, you should not owe taxes on the rewards.

The bottom line

The best rewards credit cards can help you earn hundreds (or thousands) of dollars in rewards. Even better, most credit card rewards are not taxable.

On the other hand, it is important to be wary of “no strings attached” cash or rewards offers. These offers may seem like “free” money, but you could be hit with a surprise come tax season. If you’re unsure whether or not you owe taxes on your rewards, use a tax software program or seek assistance from a tax professional.

Frequently asked questions (FAQs) about credit card rewards and taxes

• Do you have to claim credit card rewards as income?

  Most credit card rewards are not taxable since the IRS considers them a rebate on your spending. However, if you receive rewards merely for signing up for a card without having to meet any spending requirement, the IRS would consider that income. If the value of such unearned rewards is $600 or more, the card issuer is required to send you a 1099-MISC form for tax reporting purposes.

• Do you get a 1099 for credit card rewards?

  If the value of any “unearned” rewards you receive (such as a referral bonus from a card issuer) is $600 or more, your card issuer will send you a 1099-MISC form.

• Can you pay taxes with a credit card?

  The IRS allows you to pay taxes with your credit card through its authorized agents. It is important to remember, however, that you will generally owe a service charge for paying with a credit card. This fee would likely eat up any credit card rewards you may be aiming to earn on the transaction.