Credit cards provide people with a revolving line of credit, and many also enable cardholders to earn significant rewards that translate to travel discounts, gift cards and even cash.
With tax season approaching, those who’ve been racking up and cashing in on credit card rewards this past year might wonder how the IRS classifies financial gain from these rewards. It seems the IRS would want their share. But are credit card rewards taxable? This quick guide outlines what cardholders need to know about how to handle those credit card rewards come tax time.
Are Credit Card Rewards Taxable?
Thankfully, most credit card rewards are not taxable. According to the IRS, any cash-back rewards a taxpayer receives on credit card purchases “do not constitute gross income.” The IRS does not differentiate between cash-back rewards and other credit card rewards — as long as a purchase was required to earn the rewards, they are not considered taxable income.
Are Credit Card Rewards Taxable for a Business?
Like rewards earned with a personal credit card, business credit card rewards are not taxable. However, business expenses paid with rewards cannot be used as a tax deduction.
How the IRS Views Common Types of Credit Card Rewards
Many credit cards allow cardholders to earn and redeem rewards in various ways. Here is a closer look at four popular credit card rewards that the IRS views as a discount or rebate rather than income.
Cash-back credit cards reward cardholders with a percentage of cash back on some or all purchases. For instance, Discover it cardholders earn 1% or 5% cash back depending on the type of purchase. Most cash-back cards offer a percentage between 1% and 5%, with some premium cards offering up to 10% cash back in specific categories.
Cash back can typically be used as a statement credit or during checkout on certain websites — like Amazon — or on PayPal purchases.
Those with a points-based rewards card receive points for some or all purchases, and like cash-back cards, the points rewarded may vary based on the purchase. Cardholders can typically exchange points for gift cards, purchase discounts and even cash back without owing taxes. The Chase Sapphire Preferred is an example of a rewards credit card — it rewards cardholders with 1x to 5x points per purchase.
Many travel rewards cards, such as the Capital One Venture X card, reward airline miles rather than points. Even if a cardholder uses their rewards to get a free flight, it is still considered a discount by the IRS, albeit a 100% discount.
Most credit card sign-up bonuses require a cardholder to make a minimum dollar amount in purchases with the card to receive the bonus. Some card bonuses are substantial, but still considered a discount rather than income for tax purposes.
It’s important to note that this is only the case when a minimum purchase amount is required to earn the bonus — if no purchase is required, the reward is likely to be taxed.
When Do Credit Card Rewards Count as Income?
Not all credit card rewards are the result of a purchase. Such rewards may be taxable. Here are a few instances the IRS will usually classify the reward as a gift rather than a discount, since a purchase is not required to receive and redeem the reward:
- An earned bonus for a friend referral
- A gift card reward for opening a credit card account
- Airline miles that are gifted rather than earned
Credit Card Rewards and the 1099-MISC Tax Form
Chances are, if you’ve received a 1099-MISC tax form from a credit card issuer, you’ve earned taxable rewards. In some cases, you may receive taxable rewards and not a 1099-MISC if the amount is less than $600, the minimum that requires the form. You would still owe taxes even if you don’t receive a 1099.
Remember that these tax guidelines are specific to credit card rewards when preparing your taxes. Do taxes get paid on other types of reward money? In some cases, yes. You should consult an accountant or tax professional regarding rewards if you’re at all uncertain about whether you should be paying taxes on them.
Thankfully, most people can rack up as many credit card rewards as possible without including them on their tax returns. Those who pay off their card in full each month should use their rewards card for as many of their monthly purchases as possible, since the rewards can add up to significant savings.
However, those who cannot pay off that monthly balance in full should avoid the temptation to pull out the plastic for purchases merely to earn rewards. With credit card interest rates so high right now, carrying a balance will eliminate most or all the savings from those rewards.
If there is any question as to whether a specific type of credit card reward is taxable, consult an accountant or tax professional before submitting tax forms rather than risk a penalty from the IRS.
Information is accurate as of Dec. 27, 2022.
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