Are There Taxes on Credit Card Rewards?

FT Contributor  | 

Signing up for a rewards credit card can help you get more for your money, offering cash back, frequent flyer miles, free hotel stays, discounts and more when you make purchases using the card. What you might not realize, though, is that some of those perks could be taxable as income.

That’s right: depending on the type of reward you receive, and how you receive it, you may need to include it as part of your annual income. Although most consumers don’t need to worry about claiming credit card rewards on their tax return, according to the IRS, if your rewards aren’t tied to purchases, or if you earn them for making business purchases, they will affect your tax bill.

Credit Card Rewards as Taxable Income

You might be wondering whether it’s worth even considering a rewards credit card if you’re going to be charged taxes on anything you earn. Rest assured, for most consumers, there’s no need to worry. Because the majority of credit card rewards are tied to purchases (i.e. you earn cash back or points on things you buy), the IRS views the rewards as a post-purchase discount, and not a source of income.

In other words, if you earned 3% cash back on purchases, equaling $30 in cash back on a $1,000 purchase, in the IRS’s view, you received a 3% discount, not $30 in income.

The same concept applies to points or miles earned on purchases. If you earn frequent flyer miles for purchases that you then use toward a plane ticket, the earned miles are treated as a discount on the purchase. Essentially, anything you receive in exchange for using the card, even tangible gifts (such as travel gear, clothing, and the like) is exempt from taxation.

So what does the IRS tax? Anything you receive from the card issuer that is not tied to the use of your card, regardless of whether you even use the reward. For example, some card issuers offer significant bonuses simply for opening a credit card account. Those bonuses — for example, 25,000 frequent flyer miles — are taxable, because you did not have to make a purchase to earn them.

Such bonuses are rare, as most credit cards require you to meet spending thresholds to earn the bonuses (thereby making them nontaxable) but if you’re considering a card with a generous, no-strings-attached signup bonus, that reward will be taxable.

Types of Rewards That Are Not Considered Income, but May Still Be Taxable

When determining whether your credit card rewards are taxable, a good rule of thumb is whether the reward was tied to a purchase. If you had to make a purchase to get the reward, it’s not considered income. This includes:

  • Signup bonuses that have conditions, such as spending thresholds;
  • Cashback rewards;
  • Points that accumulate for discounts on future purchases;
  • Frequent flyer miles;
  • Other travel bonuses, such as free hotel nights.

Some banks also offer rebates for certain purchases. These may be called a rebate or a cashback bonus, and they are treated the same as other credit card rewards in terms of taxes: in short, rebates are not considered income, and are treated as a discount. Occasionally, banks or credit unions will offer a reward if you open an account. The reward would only be taxable if you didn’t have to deposit any money to open the account.

1099-MISC Tax Form

If you receive a reward from a credit card, the issuing bank will send a 1099-MISC form at the beginning of the year. The IRS requires companies to issue 1099-MISC forms to anyone who receives at least $600 in taxable income, including money or the equivalent from rewards. Although the threshold for receiving a 1099-MISC is $600, some companies will send them out for lower amounts.

Typically, if you have a credit card that offers taxable rewards, the card disclosures will indicate that you may receive a 1099-MISC. If you do receive one, don’t ignore it. Failing to include the income reported on this form could result in tax penalties for underreporting your income. Your tax professional can help you correctly report the income, and if you don’t believe you owe the taxes (for instance, you donated the rewards to charity or you lost the rewards for some reason), they can help you make the necessary adjustments.

Are Business Credit Card Purchases Taxable?

The rules regarding credit card rewards and taxes are fairly straightforward, but when it comes to business purchases, things are a little different.

If you use a business credit card to make purchases for your company, and earn rewards, the income is still not subject to taxes. However, because the rewards are treated as a post-purchase discount, they do reduce how much you can deduct from your taxes for business expenses.

Take the previous example of a $1,000 purchase that earns 3% cash back. Because the credit card provides a $30 reward for that purchase, it effectively reduces the purchase amount to $970. When you’re doing your taxes and claiming business expenses, you can only claim a $970 expense. So while business credit card rewards themselves are not taxable, they will reduce how much you can claim in business expenses on your tax return. This applies whether you earn travel rewards, cash back, discounts on gasoline purchases — any rewards you earn on business purchases.

The exception is if you make reimbursable business purchases with a personal card and earn rewards. For example, if you spend $100 to buy supplies with your personal card that earns 2% cash back, and your employer reimburses you $100, you do not have to claim the $2 reward as income. Under current tax laws, that reward is still considered a post-purchase discount, and the IRS will not penalize you for underreporting income when you don’t report it on your tax return.

The tax implications of credit card rewards may be complex if the rewards are not tied to your use of the card. If you have questions, talk with a tax professional, and carefully read the terms and conditions of any credit card you’re considering to prevent unpleasant surprises come tax time.


Image Source: https://depositphotos.com/

This post was updated January 22, 2020. It was originally published January 22, 2020.