There is very little insight from the Internal Revenue Service (IRS) on the treatment of credit card rewards which leaves a lot of ambiguity for the taxpayer. In general, any income a taxpayer receives is subject to tax by the government. The prominent question when considering credit card rewards is the kind of rewards received and their association.
The types 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.
- Credit card rewards may be taxable as income.
- In many cases, the rewards are viewed by the IRS as a rebate, not as income.
- Credit card referrals and sign-up bonuses are usually the most commonly taxed.
- For businesses, rebates can result in a clearly lower allowable expense deduction.
Business purchases are generally different than personal purchases but can provide some deeper insight. 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 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.
Sign-up bonuses can possibly be different. Some sign-up bonuses for your credit card do not require that you make any purchases or charge any amount to your card. If these sign-up bonuses are issued to you directly in cash with no application to your credit card purchases then they can be taxable.
Cash-back reward program considerations can vary as discussed under the above two scenarios. If a cash-back reward is attributed directly to your credit card account by your choice or through the credit card’s program, then income is generally considered a nice rebate which comes with the benefit of using the credit card. If you receive cash in your pocket directly, this is usually also a type of rebate, just like for a business, but it is less clearly tracked.
Credit Card Reward Taxation
Broadly, concerns over credit card reward taxation will typically arise when cash is actually involved and paid to you. This 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.
If you receive a 1099-MISC, this question is answered for you. The 1099-MISC is triggered when $600 of income is accumulated from taxable income payouts. If you receive the 1099-MISC then you must report the payouts as income and pay tax.
Keep in mind the $600 threshold. 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 cash-back bonuses directly, the payouts are still like a rebate to you since they are tied to purchase activity, but you may want to be on the lookout for a 1099-MISC to help provide guidance.
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 an 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.