At a Glance
If you love to rack up credit card rewards, you may wonder if those rewards come with a catch. Specifically, are they considered to be taxable income? The short answer is – it depends. While credit card rewards are not always regarded as taxable income, there are some situations in which they may be. For example, if you receive rewards for opening a new credit card account, those rewards may be considered taxable.
The best way to know for sure is to consult with a tax professional who can help you navigate the ins and outs of tax law. They will be able to analyze your specific situation and determine what gets taxed and what does not. So go ahead and enjoy those credit card rewards, but be sure to do your due diligence when it comes to taxes.
In this article, you’ll learn:
Is the average credit card debt among cardholders with unpaid balances as of December 2022.
Credit card rewards that could be taxable
Here are some situations where you might get taxed on your credit card rewards.
1. Airline rewards
There are a few situations where airline rewards could be considered taxable:
- Business purposes: If you earn airline rewards through a business credit card or a business-related expense, and you use those rewards for business travel, the value of the rewards may need to be reported as taxable income. The rewards would be considered a form of compensation or a reduction of business expenses.
- Selling or transferring rewards: If you sell or transfer your airline rewards to another person in exchange for money or other consideration, the value of the rewards could be subject to taxation.
2. Sign-up bonus
Sign-up bonuses earned from credit cards can be taxable income in certain circumstances. If you receive a sign-up bonus for opening a new credit card account, the value of the bonus may be subject to taxation.
In the U.S., sign-up bonuses are generally considered taxable income if the bonus amount exceeds a certain threshold. The credit card issuer may report the value of the bonus to you and the IRS using a Form 1099-MISC or a similar form at the end of the tax year.
3. Credit card referrals
Credit card referral bonuses can be taxable income in certain situations. If you receive a referral bonus for referring someone to apply for a credit card and they are approved, the value of the referral bonus may be subject to taxation. Like sign-up bonuses, referral bonuses are generally considered taxable income if they exceed a certain threshold.
Credit card rewards that are not taxable
You will likely not be taxed on rewards in these situations.
1. Earning points with purchases
In general, rewards points earned through regular credit card spending are not considered taxable income in the United States. The IRS typically treats rewards points as a rebate or discount on your purchases rather than taxable income. When you redeem these points for rewards such as merchandise, gift cards, or travel, they are usually not subject to taxation.
2. Airline miles earned through spending
Just like earning general points with purchases, earning airline miles through spending is considered a rebate or discount on your account, not taxable income. When you use these miles for personal travel, they are typically not subject to taxation.
How are credit card rewards taxed?
The taxation of credit card rewards can vary depending on several factors, including the type of rewards, the purpose of their issuance (personal or business), and the tax laws in your jurisdiction. Here are some general considerations:
- Personal credit card rewards: In many cases, credit card rewards earned on personal credit cards are considered a rebate or a reduction of the purchase price rather than taxable income. As a result, they are typically not subject to income tax. However, specific circumstances may affect the taxability of rewards, like earning rewards as a bonus for opening a new account.
- Business credit card rewards: Rewards earned through a business credit card may be subject to taxation. The IRS generally considers these rewards as a form of income or a reduction of expenses and may require them to be reported as taxable income. However, if the rewards are used to offset business expenses, they may be deductible, resulting in a reduced tax liability. Consult with a tax professional to understand the specific rules and reporting requirements for business credit card rewards.
How to know if you owe taxes on your rewards?
To determine if you owe taxes on your credit card rewards, it’s best to consult with a tax professional or accountant. They can provide personalized advice based on your specific circumstances and the applicable tax laws in your jurisdiction. However, here are a few general considerations:
- Consult IRS guidelines: Review the guidelines provided by the Internal Revenue Service (IRS) to understand how credit card rewards are typically treated for tax purposes. The IRS provides information on its website and in publications such as Publication 17, which covers general tax rules for individuals.
- Review credit card agreements: Carefully read the terms and conditions of your credit card agreements. Look for any information regarding the tax treatment of rewards. Some credit card issuers may provide specific information on whether rewards are considered taxable income.
How can you avoid taxes on credit card rewards?
In many cases, credit card rewards are considered taxable income, and it’s generally expected that you report them on your tax return. However, there are a few strategies that may help you minimize the tax impact:
- Categorize rewards as a rebate: If the credit card rewards are considered a rebate or a reduction of the purchase price rather than taxable income, you may not need to report them. Consult with a tax professional to determine whether this classification applies to your specific rewards.
- Business credit card rewards: If you earn rewards through a business credit card, they may be deductible as a business expense. Consult with a tax professional to determine the eligibility and proper reporting of business-related rewards.
- Gift or non-taxable events: Some credit card rewards may be considered gifts or non-taxable events under certain circumstances. For example, if you receive rewards as a result of opening a new account, they may be classified as non-taxable bonuses. Again, consult with a tax professional to understand the specific rules and requirements.
In most cases, rewards earned from business credit cards are considered taxable income by the Internal Revenue Service (IRS) in the U.S. When you earn rewards, such as cashback, travel points, or other incentives, they are often treated as a form of income, just like any other payment you receive.
The value of the rewards you earn may be reported to the IRS by the credit card issuer, and you may receive a Form 1099-MISC or Form 1099-INT at the end of the tax year, depending on the type of rewards you receive and their value.
The IRS generally does not consider cash back rewards on personal credit cards as taxable income because they are seen as a discount or a refund on your purchases. However, if you receive cash back as a bonus for opening a new credit card account or if you earn cash back through a business card, the IRS may consider it taxable income.
Credit card rewards are generally not considered passive income. Passive income refers to income generated from investments or activities in which the individual is not actively involved. Examples of passive income can include rental income, dividends from stocks, or interest from savings accounts.
Yes, credit card companies are required to report certain information to the Internal Revenue Service (IRS) in the United States. Specifically, they are required to report payments made to merchants through credit card transactions. The reporting is done through the submission of Form 1099-K, which outlines the gross sales transactions processed by the credit card company on behalf of its customers.
The purpose of this reporting requirement is to ensure accurate reporting of income by businesses and individuals. The information provided on Form 1099-K helps the IRS cross-reference the reported income of businesses and individuals with the transactions processed through credit cards.