Are my credit card rewards taxable?
Key takeaways
- If your credit card issuer offers you rewards for making purchases, the IRS considers the rewards a rebate and not taxable income.
- If an issuer offers you bonus rewards with no purchase requirement, they may be taxable.
- In some cases, if you’re awarded credit card rewards that are worth $600 or more, the IRS requires the issuer to send you a 1099-MISC form to report on your income tax filing.
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 Internal Revenue Service (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. Here’s the rundown on credit card rewards and taxes.
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.
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.
When travel 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, they may be taxable. In that case, 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 airline credit 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.
When 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, many of the best cash back cards have a welcome offer of $200 in cash back rewards after spending $500 in the first few months. 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.
When credit card referrals could be taxable
The same principle applies to certain credit card referrals. If you receive a reward when you refer someone to sign up for a new card, this is considered taxable income.
“[Referral bonuses] are like rewards that have no strings attached, that are not based on a purchase,” says Lisa Greene-Lewis, CPA and tax expert at TurboTax.
And if you received more than $600 in no-strings-attached credit card rewards from referrals, then the issuer will send you a 1099-MISC tax form, according to Greene-Lewis. But you should still include credit card referral bonuses that total less than $600 on your taxes.
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. “When it’s based on a purchase, it’s kind of like a discount on the items you’re purchasing,” Greene-Lewis notes. 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.
Tread carefully when you come across credit cards that offer a bonus without a spending requirement — or referal bonuses. This is where things can get complicated. These “no strings attached” offers may seem like freebies, but they are likely considered taxable.
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.
“I know for some people, they don’t even think about it being taxable,” Greene-Lewis says. “I would just think about it as: If there are no strings attached, then it would be 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 you owe taxes on your rewards, use a tax software program or seek assistance from a tax professional.
Frequently asked questions about credit card rewards and taxes
