With cash-back rates getting as high as 5% nowadays, credit card rewards can result in some significant bucks, especially if you buy a big-ticket item. Great for you as a consumer—but also a lot of ambiguity for you as a taxpayer.
Unfortunately, the Internal Revenue Service (IRS) doesn't say much directly on the treatment of credit card rewards. But in general, any income a taxpayer receives is subject to tax by the government. The type of rewards and the way in which you receive them can be the main factor for determining whether they are considered taxable
In some cases, the rewards may be viewed as a rebate or discount, not as income. For example, a rewards program for using your credit card is treated as if it were actually a post-purchase rebate. However, there are some credit card reward programs that offer large sign-up bonuses—which the IRS may end up counting as taxable income.
- Whether credit card rewards are taxable as income depends on how the rewards are received.
- If earned through the use of the card, like a cash-back bonus, the rewards are viewed by the IRS as a rebate and not taxable income.
- Rewards provided as an incentive just for opening an account (without you spending any money) could be considered taxable income.
- Taxes generally only come into play with rewards totaling over $600 annually, for which you'd receive a Form 1099-MISC.
- Rewards earned on a business credit card may affect the amount you can deduct from those business expenses.
The situation is slightly different if the purchase is for business purposes, rather than personal ones. If you have a business credit card, a good general rule of thumb is that any rewards on those business purchases should be subtracted from their overall cost—and thus, the amount that you can deduct from your taxes.
So it's not technically boosting your taxable income, but the net result does increase your tax burden.
Types of Rewards That Are and Are Not Income
Oftentimes, the kind of reward received dictates its taxable status.
Many credit card reward programs never involve an exchange of cash. Types of common credit card rewards that are treated in this manner include travel miles, accumulated points toward future purchases, and reward discounts automatically applied as balance credits. So, without cash being directly received, these sorts of rewards are non-taxable, it's generally safe to say.
Sign-up bonuses for getting a new credit card can possibly be different. Some of these bonuses do not require that you make any purchases or charge any amount to your card. If these sign-up bonuses are given you directly in cash for just opening the account, then they might be taxable—as extra unearned income. They can't be considered a refund, since you didn't actually spend any of your own money.
So, where do cash-back reward programs fit in? It varies. If a cash-back reward is credited directly to your credit card account, then income is generally considered a nice rebate which comes with the benefit of using the card. If you actually receive a cash-back check directly, though, it gets a little trickier: It probably also would be considered a type of rebate, but it could technically count as income.
How Credit Card Rewards Are Taxed
Broadly, concerns over your credit card rewards getting taxed will typically arise when cash is actually paid to you. This scenario occurs with a sign-up bonus and then with some cash back programs. Generally, a sign-up bonus payout would be more comparable to a lottery winning while a cash-back payout would be like a rebate.
Another key factor in credit card rewards being taxable: how much money you actually accrue in a year. The magic threshold is $600. As with income in general, taxes could only come into play with sums greater than that.
It's unlikely it'll occur. Many cash-back reward programs pay 1% or 2% cash-back at the most. With a 1% cash-back program, you would need to spend $60,000 in a year to reach the $600 threshold. With a 2% cash-back program, you would need to spend $30,000 in a year to reach the $600 threshold.
Even if you are spending this much, and taking in the $600-plus cash-back bonuses directly, the payouts are still like a rebate to you, since they are tied to purchase activity.
1099-MISC and Credit Card Rewards
If you receive a 1099-MISC from the credit card company, the taxability question is answered for you. IRS Form 1099-MISC: Miscellaneous Income is only issued (with copies to you and to the IRS) when $600 of income is accumulated from taxable income payouts. So, if you receive the 1099-MISC, then you must report the payouts as income and pay tax.
In short, 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 income should not qualify as taxable you are better off talking to a tax expert. The IRS has become increasingly stringent on 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 when a 1099-MISC was issued.
Donald P. Gould
Gould Asset Management, Claremont, CA
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. However, rewards provided as an incentive for opening an account could be considered taxable income.