Are Credit Card Rewards Taxable?
EG
Summary:
Credit card rewards are typically not taxable if you have to meet a spending threshold to earn them. This is the case for your personal credit card as well as any cards you use for business expenses. But there are some exceptions, so be sure to read the fine print. For instance, if a credit card’s rewards are given without a spending requirement, then they may be treated as a signup bonus and could be taxable.
Credit cards are a convenient way to manage your cash flow. If you use them correctly, they can also provide major perks, including cashback, travel rewards, sign-up bonuses, and more. No, you probably won’t get rich from credit card rewards. However, you could earn enough to pay for a major purchase or large vacation each year (and possibly more, if you use credit card hacking).
Anytime you’re earning money from something, it’s important to consider the tax consequences. The last thing you want is to neglect to report something on your taxes, only to have the Internal Revenue Service (IRS) notice your mistake and come to collect what’s theirs. In this article, we’ll help you feel more confident about using credit card rewards by explaining the tax implications — if there are any — and a few other things you should know.
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Types of credit card rewards
Credit card rewards serve as an incentive from a credit card issuer for you to sign up for or use their credit card over another. Credit card rewards can come in several different forms, but there are three that you’re most likely to find:
- Cashback rewards. Companies often offer a percentage of cashback on your spending. For example, your credit card might come with 1% cashback on all purchases. If you spend $1,000 per month, you should earn $10 in rewards.
- Points or miles. Rather than cashback, other credit card issuers offer points or miles, usually relative to the amount you spend. Companies often offer one or more points for each dollar. Depending upon your credit card, those points can be redeemed for cashback, airline miles, and more.
- Sign-up bonuses. Many credit card companies offer a sign-up bonus, where you get a certain amount of cashback or number of points when you sign up for the card. However, these cards usually require that you spend a certain amount in a specified period of time.
Tax treatment of credit card rewards
The question that credit card users may find themselves asking is whether these credit card rewards are subject to income taxes. In most cases, the answer is no, but there are exceptions.
In the case of cash back, rewards miles, and rewards points, the IRS doesn’t distinguish between them. It considers all of them to be rebates or discounts, which aren’t subject to income taxes. There’s one catch though: these rewards are only nontaxable if you had to meet a spending threshold to “earn” them. If you don’t have to spend money to earn the reward, then it can’t be considered a rebate or discount. Instead, they could be considered a signup bonus or gift and could be taxable.
Real-life example:
There’s even been a court case that has upheld this treatment. In a well-known lawsuit, Konstantin Anikeev found a way to hack his credit card usage and earn more than $300,000 in cashback rewards, which the IRS then argued was taxable income.
However, a tax court sided with the IRS’s existing tax treatment of credit card rewards. They argued that the large amount wasn’t taxable income because Anikeev had to spend money on his credit cards to earn it.
Are credit card rewards taxable income for a business?
Most people earn rewards from their personal credit cards, but rewards aren’t limited to these cards. Many businesses also rely on credit cards for their spending and therefore earn rewards for travel or to save money on business purchases. If you’re earning credit card rewards for your business, it’s important to understand the tax implications.
Just like with personal credit cards, rewards earned on business credit card spending aren’t considered taxable income as long as the credit card company requires you to spend money to earn them. However, there are other tax consequences.
Business expense deductions
The IRS allows businesses to claim a deduction for their business expenses. If you earn cashback on your credit card, you may not be able to claim the full deduction. Remember, the IRS considers credit card rewards to be a discount. If you received a discount on a product, you can’t claim a deduction for the non-discounted amount.
Suppose you made a business purchase of $1,000 and earned $20 cashback. You can only deduct $980 for that purchase when you file your business tax return, not the full $1,000.
Taxable rewards
As we’ve mentioned, you won’t pay income taxes on most credit card rewards (at least not how they’re usually structured). However, there are some financial rewards you may be on the hook for.
Remember, we stated that the IRS considers credit card rewards to be discounts or rebates, which is why they aren’t subject to income taxes. That rule only applies if you have to make a purchase (or purchases) to earn the reward. If a company offers you a financial reward or bonus without you having to buy anything, then it could be subject to income taxes.
Examples of taxable income from rewards
Most credit cards have sign-up bonuses that require you to spend a certain amount of money in a certain number of days to be eligible. What about a bank that offers a cash bonus if you open an account? Because you didn’t have to spend money to earn the bonus, you would technically have to claim it as income taxes.
Another example of a taxable bonus is a referral bonus. This is when a company offers a financial incentive when you refer friends and family to their service. If you refer a friend to your favorite credit card and they sign up, the referral bonus you earn would technically be taxable income.
Pro Tip
Be sure you’re tracking unearned financial incentives like sign-up bonuses and referral bonuses throughout the year. This will allow you to accurately claim them on your tax return.
How to report rewards on your income tax return
If you earn bonuses and rewards that are subject to income taxes, you’ll have to claim them on your annual tax return. When you earn taxable rewards, a company may send you a 1099 form, but usually not until you earn $600 or more. That being said, you’ll still have to claim rewards, even if you don’t receive a 1099 form.
Whether you receive a 1099 form or not, you’ll report your taxable rewards on your income tax return, which may result in an increased tax liability. While it can feel frustrating to pay more taxes for something you don’t consider income, it’s preferable to an IRS penalty for underpayment.
Key Takeaways
- There are several types of rewards credit cards, including cashback, points or miles, and sign-up bonuses.
- In most cases, credit card rewards are considered rebates or discounts and, therefore, aren’t subject to income taxes.
- If you’re a business owner, any credit card rewards you earn may reduce the amount you can claim on your business tax return in business expenses.
- If you earn rewards that you don’t have to buy anything to earn, you may have to pay income taxes on them, since they can’t be considered a rebate or bonus.
Start earning rewards today
Credit cards have become increasingly popular over the years. More people rely on credit cards for their daily spending, and more companies have introduced bonuses and rewards to incentivize consumers to use their cards over others.
The good news is that, in most cases, you won’t have to pay income taxes on your credit card rewards. If you aren’t already earning credit card rewards, there’s never been a better time to start. We’ve rounded up the top credit cards to help you fit the rewards that best fit your spending style.
EG
Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.
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