In some cases, the IRS (Internal Revenue Service) does consider credit card rewards taxable income and in some cases, they don’t tax earned rewards. Confused? Don’t worry: Read on to learn when credit card rewards are taxable income and when they aren’t.
What Are Credit Card Rewards?
To better understand how credit card rewards are taxed, it can help to know what credit card rewards are. When a consumer uses a credit card they may earn different credit card rewards, such as points, cash back, and airline miles.
Depending on their redemption value, these rewards can be worth up to hundreds if not thousands of dollars. Your cardholder agreement should outline the credit card rules for how to earn rewards using a specific credit card, as well as how to redeem them.
How the IRS Treats Credit Card Rewards
In some cases, credit card rewards are taxable; in other cases, no. Take a closer look at which types of rewards and in which scenarios credit card rewards are counted as taxable income by the IRS.
Rewards Treated as Rebates on Spending
Luckily, cash back rewards and other rewards like miles or points aren’t considered taxable income when earned by making purchases. The IRS considers these types of rewards as rebates, discounts, or bonuses rather than income.
The trick is that the cardholder has to spend a certain amount to earn a reward in order for the IRS to not classify the rewards as income. For example, if a new credit card offers $200 in cash back when the cardholder spends $2,000 within the first six months of opening their account, that $200 would not be considered taxable income.
Rewards Considered as Income
Certain rewards are considered income. The way to identify which rewards are taxable income is by looking at how they’re earned.
As mentioned previously, if someone spends money to earn rewards, those rewards won’t be taxed. If, however, someone is given a $150 gift card simply for signing up or referring a friend for a new credit card, that $150 is viewed as taxable income — because they didn’t spend any money to earn it.
When Are Credit Card Rewards Taxed?
Again, credit card rewards that aren’t earned through spending (such as some introductory bonuses) can count as income that the IRS will expect the cardholder to pay income taxes on. Some scenarios in which credit card rewards may get taxed include:
• If you received a sign-up bonus simply for opening a credit card or account
• If you earn a reward for referring a friend
When Your Credit Card Rewards Are Taxable
As briefly mentioned above, any monetary rewards that a cardholder didn’t earn through spending can be considered taxable income.
Let’s look at how this can work with two different credit card bonus offers. If a cardholder is offered $100 if they spend $1,500 in the first three months of having their account open and they spend enough to earn that bonus, that reward won’t count as taxable income. On the other hand, if a cardholder is offered a $100 gift card simply for opening their new account, they will need to pay income tax on the $100.
When Your Credit Card Rewards Are Not Taxable
As briefly mentioned above, credit card rewards aren’t considered taxable income if someone spends money to earn them. When a cardholder acquires the rewards (cash back, travel miles, etc.) through purchases, then those rewards are classified as a rebate or a bonus, not taxable income.
For instance, this may include:
• Sign-up bonuses that require meeting a spending threshold
• Rewards earned from credit card spending
• Miles earned through travel
Are Business Credit Card Rewards Taxable?
It doesn’t matter if the rewards are earned with a personal credit card or a business credit card — the same rules surrounding income taxes apply.
Where business credit cards can affect taxes is when it comes time to take tax deductions. For example, if someone bought $2,000 worth of equipment for their business and earned $40 in cash back rewards doing so, they can only deduct $1,960 on their taxes. In other words, they can only deduct the net cost of business expenses, which cash back reduces.
How to Know If You Owe Taxes on Credit Card Rewards
It can be hard to keep track of how much taxes are owed on credit card rewards. If someone earns a bonus without having to meet a spending requirement, the credit card company might send the cardholder an IRS Form 1099: either a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned.
Whether or not you receive this form, however, you’ll need to report the bonus on your income taxes. To make doing this easier, it can be helpful to keep track of any bonuses not earned through spending. That way, if the credit card issuer doesn’t send a Form 1099-INT or Form 1099-MISC, you can still complete your taxes properly.
Reviewing old statements to look for statement credits in the form of cash back or other types of rewards can be helpful.
Recommended: How to Pay Taxes With a Credit Card
Avoiding Taxes on Your Credit Card Rewards: What to Know
To avoid taxes on credit card rewards, all the cardholder has to do is not seek out credit cards that offer bonuses for simply signing up for the credit card. If the rewards are earned through spending, they won’t run into any taxes, thus allowing them to pay less tax.
The Takeaway
In general, taxes only apply to rewards that don’t require any spending to earn. If you’ll owe taxes on your rewards, the credit card issuer typically will send a Form 1099-INT or Form 1099-MISC specifying the amount of income you’ve earned and will need to report.
Being smart about credit cards and their usage is about more than just rewards, however.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Are credit card cash back rewards taxable?
Only credit card rewards that cardholders receive without having to spend money to earn them in any way are considered taxable income. If a cardholder earns cash back for spending money using their credit card, it won’t count as taxable income.
Are loyalty points taxable?
If someone spends money to earn loyalty points (such as purchasing airline tickets), they won’t have to pay taxes on those points. If, however, they received the points simply for signing up for a credit card, that would count as taxable income that they’ll need to report.
Are credit card rewards reported to the IRS?
In some cases, yes, credit card rewards are reported to the IRS. When this happens, the credit card company might send the cardholder a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned that they’ll need to report.
Do you have to pay taxes on credit card rewards?
Cardholders need to pay income taxes on credit card rewards they didn’t need to spend money to earn. If they had to spend money to earn a reward, such as cash back, that won’t count as taxable income.
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