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Are Credit Card Rewards Taxable?
We’re the first to admit: we love credit card rewards! Ranging from cash back and points to travel miles, credit card rewards are an easy way to get more value out of every dollar we spend. However, putting aside the excitement of earning and redeeming rewards, a crucial question often arises: are credit card rewards taxable?
The short answer? No. Credit card rewards are not considered taxable income by the Internal Revenue Service (IRS) in most cases. The IRS categorizes rewards as discounts or rebates on purchases made with your credit card, rather than as income. However, as with most tax-related matters, there are exceptions.
The Basics
The IRS’s stance on credit card rewards is that they are typically a form of rebate or discount and not income. For instance, if you use a credit card offering 1% cash back on all purchases, the IRS views this as a discount on purchases rather than income you earned. Similarly, points or miles earned for spending are considered rebates on what you've already spent.
Exceptions and Considerations
While the general rule is straightforward, certain scenarios could potentially change how rewards are taxed.
Here are a few exceptions and considerations:
- Bonuses for Opening an Account: Sign-up bonuses for new credit cards sometimes fall into a gray area. If these bonuses require you to make purchases to earn them, they're generally treated as rebates and not taxed. However, if you receive a bonus without needing to make purchases (e.g., a bank deposit bonus), the IRS might view this as taxable income.
- Referral Bonuses: did you refer friends and family to a credit card and earn some bonus points in return? Unfortunately, you’ll likely receive a 1099 for that because the bonus is considered income since you didn’t have to spend to get these rewards. For referral bonuses valued at $600 or more, it's common practice for major issuers to issue 1099 forms. If you don't receive a 1099 form, you have the option to request one from your bank or to make an estimate of the income yourself. Regardless of whether you receive a 1099 form from the bank, it's mandatory to report this income to the IRS.
- Interest-Bearing Accounts: Rewards in the form of interest earned on credit card accounts, such as those that might be applied to a savings account, could be considered taxable interest income.
- Business Credit Cards: How the IRS may view business credit card usage might differ, especially if the expenses are also deducted for business purposes. If you’re a business owner, it’s crucial to discuss this with a tax professional to understand the implication.
Best Practices to Stay on the Safe Side
Document, document, document: Keep detailed records of your credit card rewards and any related terms. This documentation is important if any questions arise at tax season.
Talk to a Professional: Tax laws and interpretations can and do change. Consulting with a tax professional can help ensure you're not overlooking any taxable scenarios related to your credit card rewards.
Review IRS Guidelines: Stay informed about any IRS updates or changes in the treatment of credit card rewards. The IRS occasionally issues guidance that could affect how these rewards are viewed from a tax perspective.
Bottom Line
While the landscape of credit card rewards remains largely tax-free - thank goodness - it's the nuances and rare exceptions that underscore the importance of staying informed. Especially if you referred folks in 2023, bear in mind you’ll likely receive a 1099 from the issuing bank. If you don’t receive one, you should still request one and report it to Uncle Sam.
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