Are Credit Card Rewards Taxable?

Earning credit card rewards gives you a great way to capitalize on your spending, be it for personal or business purposes. With several credit cards offering high reward rates on category-based spending, the potential to save money throughout the year can be significant. However, are credit card rewards taxable?

Whether or not you need to pay tax on credit card rewards depends on how you earn them. For instance, if you’ve earned rewards by spending money, you’re pretty much in the clear. This changes if you earn rewards without spending money. Taxes on rewards earned through business credit cards work slightly differently, as you need to deduct these from your expenses when filing taxes.

Whether you earn cash back, points or miles, the taxation perspective remains the same.

• Are Credit Card Rewards Taxable Income?
• Are Credit Card Rewards Taxable for a Business?
• Are Credit Card Points, Miles or Cash Back Taxable?

If you earn rewards by spending money, you can expect the Internal Revenue Service (IRS) to view those rewards as discounts and not income. For instance, if you get $200 cash back through a welcome offer by meeting a spend-based requirement, it does not qualify as taxable income.

However, you might need to pay taxes on credit card rewards if you earn them without needing to spend any money. For instance, some bank accounts and credit cards offer gift cards and cash rewards for simply opening a new account, as is the case with the Amazon Rewards Credit Card, which comes with a $100 Amazon gift card upon approval. Since there is no purchase linked to earning this reward, it adds to your taxable income.

Many credit cards allow cardholders to refer friends and family to apply. When cardholders receive points, miles or cash back from referring others, the IRS will view it as income too.

There is no need to report credit card rewards you earn via spending money. The IRS views these as discounts. When it comes to rewards you earn through offers that do not require you to spend any money, make sure you include them in your taxable income.

You should receive a Form 1099-MISC: Miscellaneous Income from your credit card issuer if the cash value of the rewards you earn without needing to spend any money exceeds $600. Some banks issue Form 1099-MISC for earnings below this threshold. Receiving this form is an indication that you have to report the rewards in question as taxable income.

But regardless of how insignificant the cash value of any non-spending-linked rewards might be, and whether or not you receive a Form 1099-MISC from your card’s issuer, you need to report these rewards as income when you file your taxes.

Taxes on rewards earned through business credit cards work in the same basic manner as with consumer credit cards. However, these rewards come into play when you’re reporting your expenses. This is because the rewards you earn through a purchase will affect its net cost.

Consider this example. You pay $2,000 for new office equipment, on which you earn 3% cash back. The dollar value of the cash back amounts to $60. As is the case with consumer credit cards, since this cash back involves a purchase, it does not qualify as income. However, the cash back brings down the net cost of the purchase to $1,940, which is what you’ll need to mention when reporting this expense.

If you earn rewards without having to spend any money, you’ll need to report the same as taxable income.

There is no difference in how the IRS views the cash back, points or miles you earn with a credit card. For example, if you earn $200 cash back over the course of a year by making purchases on a cash back card, or if you earn 300 miles for booking a flight by using a travel card, the IRS views both as discounts. As long as you spend money to earn cash back, points or miles, they do not count as income.

This is also the case with spend-based welcome offers. For example, the $200 cash back you stand to earn as a welcome bonus by using the Amex Cash Magnet Card and spending $2,000 on purchases in the first six months does not qualify as taxable income.

If you receive miles, points or cash back without spending any money — through a welcome offer, a referral bonus or in any other way — you need to report that cash value as income. In such cases, it’s your card issuer’s responsibility to arrive at a dollar value for the rewards.

Understanding answers to commonly asked questions about taxes on credit card rewards will hold you in good stead when it’s time to file your taxes the next time around.

Now that you know which credit card rewards are taxable income, make sure to properly report those when filing your taxes. People who don’t have a rewards credit card may consider looking at what these cards have to offer after accounting for personal spending patterns and aspects such as reward rates, annual fees and interest rates.