Are Credit Card Rewards Taxable?

Kat Tretina

February 15, 2019  •  3 Minute Read

Taxes

With tax season here, you are probably taking a long hard look at your finances and a sudden thought occurred to you, “Do I have to report my credit card rewards on my taxes?” The answer is a resounding maybe. There are a lot of perks to earning rewards but Uncle Sam can lessen the impact of those rewards in some instances. We can help you figure out what you need to report on your credit card rewards during tax time.

Personal Credit Cards

For the most part, you will not have to worry about your smaller amount rewards getting caught up in the IRS. Overall, cash back rewards do not need be reported because they are considered a discount, not reportable, taxable income.

For example, let’s say you are earning 1% cash back on all purchases. The IRS views your 1% reward as a discount and discounts are not taxable. So it's not necessary to keep track of those credit card rewards for tax purposes. However, there are large cash bonuses that might be taxable if they are above a certain amount.

A lot of credit cards will offer an impressive sign up bonus as incentive to new clients, and those large sums might be taxable. Take a close look at your credit card agreement and it will disclose whether or not your rewards will be reported as income to the IRS. A good rule of thumb is if you received the bonus without meeting additional requirement, like a minimum spending amount, it is probably taxable. But if you open a new credit card and have to spend $1,000 in the first 3 months in order to receive a reward, then in those instances it most likely not going to impact your taxes.

If you think your rewards might fall into the taxable category and you aren’t sure what next steps to take, don’t worry. Your credit card company should mail you a 1099 MISC form which is how you will report your rewards as income on your taxes.

Cash back and sign-up bonuses aren’t the only rewards that can be involved with taxes, though. Travel rewards can be reported as income, too. A good practice to get into is to carefully review your credit card agreement for what might be reported to the IRS as taxable income, especially if you are deciding between credit cards. If you receive a 1099 MISC form, it’s important to fill it out as part of your taxes, even if you do not feel like your rewards qualify as income. If you think it is an error, it’s best to consult with a tax professional.

Business Credit Cards

When it comes to the taxability of business credit cards, things get a bit more complicated. If you receive a credit card rebate for a purchase on your business credit card, then the IRS does have a say in those rewards. Basically you will need to subtract the amount of the rebate from the total cost of the purchase. This in turn lowers the amount you can deduct from your taxes.

Let’s give an example. You just purchased $500 computer for work and received a $50 credit card rebate. That means that only $450 of that purchase can be deducted for the cost of the business expense. Although this isn’t technically a taxable income, it does mean an increase to your tax burden.

Travel rewards on a business credit card are another story, but it has a happy ending. If you earn travel points on your business credit card, but are using them for personal use, then it does not fall into the category of taxable income. According to a statement by the IRS, using those frequent flyer miles will not result in personal tax liability.

Overall, Credit Card Rewards Are Still Worthwhile

In the competitive credit card market, there can be some great benefits and rewards you can earn with your spending. For the most part, especially for personal credit cards, you do not need to worry about your credit card rewards being taxed. With a few exemptions around large cash bonuses, you can enjoy the perks of your credit card without having to worry about Uncle Sam knocking on your door.