Are credit card rewards taxable?


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The only thing more satisfying than earning credit card rewards is spending those rewards on something special. If you understand your credit card rewards programs and spend wisely, you can maximize your rewards for more free flights, gift cards, and cash.

But will the IRS come knocking if you don’t report these rewards on your tax return?

Whether credit card rewards are taxable depends on the situation, especially how you earned the rewards. Here’s everything you need to know about tax regulations around credit card rewards, so you can spend less time worrying about the tax implications of your free vacation, and more time enjoying it.

Types of credit card rewards

There are several types of credit card rewards, and many credit card issuers offer flexible redemption options for the points you earn. “The most important thing is not whether they call it points, cash back or miles, it’s what they’re worth and what you can redeem them for,” says Beverly Harzog, Credit card expert and consumer finance analyst for the United States. News and World Report. There are generally three types of credit card rewards:

Reward Points or Miles

Travel credit cards often earn points or miles that can be redeemed for travel. Some credit card issuers allow you to redeem these points for a variety of options, such as credit on a statement, cash back, or a travel reservation. For example, the Capital One Venture Rewards credit card earns twice the miles for every dollar spent, and you have the flexibility to redeem those rewards as you see fit.

Keep in mind, however, that points and miles generally get better redemption value when you use them to book travel. This is especially relevant with the Chase Sapphire Reserve®, where your points are worth 50% more when you use them to book travel through the Chase Ultimate Rewards Portal. Since you can get up to 10x more points in some spending categories, that means you could get up to $ 15 in travel for every $ 100 you spend.

Cash back

Cash back credit cards generally have a straightforward earning rate and generally do not offer increased value for your points on travel redemptions. These cards are suitable for infrequent travelers or those who prefer a simple rewards system. “I like cash because it’s easy, there are no restrictions and I can use it for whatever I want,” explains Eric Bronnenkant, CFA, CFP and head of tax at Betterment.

For example, the Citi® Double Cash card allows you to get back 2% on every purchase with no annual fee. Some cards also have higher reward rates for certain categories – the Blue Cash Preferred® card from American Express offers a 6% rebate on up to $ 6,000 per year in grocery and supermarket purchases.

Sign-up bonus

“A sign-up bonus is one of the incentives that credit card issuers have to get new customers for their credit cards,” says Harzog. Typically, you will need to spend a certain amount of money within the specified time frame to earn the bonus, but you should never spend more than you normally would to get the points. “What’s really important to remember with the signup bonus is that you are using the card for things that you would buy anyway,” Harzog adds.

Bronnenkant also brings up something else to keep in mind. “Some cards have relatively high points and miles to make a switch, but they may not be the most attractive cards in the long run,” he says. You’ll want to make sure the card offers ongoing rewards that meet your needs before you apply. For example, the Chase Sapphire Preferred® card offers a lucrative sign-up bonus of 60,000 points worth $ 750 for travel and also has a strong ongoing points system. The American Express Platinum Card® offers 100,000 points after spending $ 6,000 in the first six months, while offering a high reward rate on travel and meal purchases. Keep in mind that the bonuses are usually much higher for cards that have an annual fee, which could help you offset the cost of the first year.

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Are credit card rewards taxable?

Whether you should pay tax on your credit card rewards depends on the situation. However, the distinction lies in how the rewards are earned, not how they are redeemed.

Pro tip

Credit card rewards are not taxable as long as you spend something to earn them.

“In general, the IRS doesn’t really differentiate between cash or points,” says Bronnenkant. Instead, the IRS looks at what you did to earn those rewards, regardless of how you spend them. Here are what types of rewards are tax-free and which are.

Non-taxable rewards

The points, miles and cash back rewards you earn by making purchases with your credit card are not taxable. The IRS considers these rewards to be a discount.

“As a general rule, if you receive cash back rewards or points for spending money, what you receive is generally not taxable, because it is really considered a return of your own money,” says Bronnenkant.

So if you spent $ 3,000 to earn a signup bonus, the value of that bonus does not need to be declared on your tax return. And if you got 1.5% cash back or 2X miles on your purchases, those rewards wouldn’t be taxable either. Most of the rewards you earn from your credit card issuer fall into this category.

Taxable rewards

The rewards are taxable if you received the incentive without having to spend anything. This is where it gets tricky, says Harzog. “When you accept a bonus or reward and you don’t have to do anything to earn it, it’s a freebie, so you can check with your tax preparer,” she says. The IRS considers certain types of gifts to be taxable.

Bronnenkant has an example. “Let’s say I signed up for a card and I get my 1.5% cash back, then the card gives me $ 200 or 10,000 points because I referred a friend. I didn’t have to spend anything to get this benefit, so in this case, whether I get points or miles, I usually have to pay taxes, ”he explains.

Another situation where you may be required to pay taxes is if you used your personal credit card for a business expense and received cash rewards. Although the IRS does not consider miles or points used for future trips to be taxable, you must report any rewards for a purchase reimbursed by the employer on your tax return if they are in the form of cash.

Also, keep in mind that if you use a business credit card to make tax-deductible purchases, you must subtract the rewards from the total value of your business expenses before claiming the deduction. For example, if you used $ 100 in miles to pay for part of a $ 500 flight for a business trip, you can only claim a deduction for the $ 400 you paid out of pocket.

How to Report Credit Card Rewards on Your Taxes

If the reward exceeded $ 600, you will receive a 1099-MISC from the credit card issuer to include on your tax return. However, Bronnenkant notes that “Even if you don’t get 1099 for it, that doesn’t mean you don’t have to pay taxes.” There’s a catch-all line for reporting other income on your tax return, he says, and it’s your responsibility to include any bonuses or rewards you’ve received without having to spend any money.


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