According to the Internal Revenue Service (IRS), credit card rewards may be taxable as income. The types of rewards and the way in which you receive them determine whether they are considered taxable. In many cases, the rewards are viewed by the IRS as a discount, not as income. For example, a cash-back program for using your credit card is treated as if it were actually a post-purchase discount. There are some credit card reward programs that offer large sign-up bonuses, however, which the IRS may end up counting as taxable income.
Business purchases are completely different than personal purchases, however. If you have a business credit card, a good general rule of thumb is that any rebates on those business purchases are subtracted from the costs of your purchases, reducing the amount that you can deduct from your taxes. This is not technically taxable income, but the net result does increase your tax burden.
Types of common credit card rewards that are not counted as income include cash-back programs, travel miles bonuses, accumulated points towards future purchases and credit card sign-up bonuses that require a financial transaction to be realized.
If, however, the sign-up bonus for your credit card does not require that you make any purchases or charge any amount to your card, then you are likely to receive a 1099-MISC tax form in the mail in conjunction with the bonus. Since the IRS requires that these benefits be treated as income, you must document your rewards on the 1099 form.
You do not necessarily have to receive money in order for the sign-up bonus to be considered taxable. Anything that is provided without being attached to the use of your card – such as airline miles, gifts that are tangible goods or other valuable rewards – are normally taxable income. If you have questions about your credit card reward programs and their tax implications, it is best to consult an actual tax expert and not the issuing credit card company.
If you receive a 1099-MISC form in the mail as part of a rewards program, do not ignore it. Even if you believe that your gift should not qualify as taxable income (or if you plan on donating your gift to charity, creating a possible tax deduction), you are better off talking to an expert. The IRS has become increasingly competent at tracking income from these sources, and you do not want to subject yourself to a tax penalty because you failed to report your credit card rewards appropriately.
The Advisor Insight
It depends on how the rewards are received. Most rewards are earned through the use of the card itself; for example, receiving one reward point for every dollar spent on a card. These rewards are considered rebates and are not taxable. However, rewards provided as an incentive for opening an account could be considered taxable income.
As one example, Citibank has reportedly issued Form 1099s on frequent flier miles given as a bonus for opening a bank account. In contrast, rewards for opening a credit card account generally are credited only after the cardholder meets a certain spending minimum on the card over a specified time period. The rewards are therefore viewed as rebates and consequently are not taxable.
Donald P. Gould
Gould Asset Management