A Short Article Prepared for the MoneyGeek Website

Expert Advice on Are Credit Card Rewards Taxable?

Mark Koscinski, CPA

Mark Koscinski, CPA

Asssociate Professor of Accounting Practice at Moravian University in Bethlehem

Could you share some strategies for maximizing credit card rewards while minimizing tax liability?

The Internal Revenue Service requires you to report income from whatever source. Thankfully, most credit card reward programs do not generate taxable income. Here is why. While there are an amazing number of reward programs, they generally fall into two categories:

  • Rebates on spending and
  • Rewards were treated as income because they were in exchange for a service.

Let’s look at the difference between the two programs.

There is no need to pay taxes on reward miles for traveling, points or cash back earned from a credit card, even if it’s a bonus for opening a new account if there are purchase or transaction requirements or rewards for personal spending. Purchases must be made to earn those rewards, and the IRS considers the rewards a rebate or a discount rather than income. In short, the IRS will consider the rewards as an adjustment to the purchase price. This is by far the most common situation.

How are credit card rewards that are earned jointly with someone else (like a spouse or business partner) handled for tax purposes?

Certain types of credit card reward programs can generate taxable income because they are deemed to be payment for services. Examples of these types of programs are:

  • Sign up for bonuses where cash is deposited into an account. Airline points are valued and are then taxable income.
  • Gift cards since they are cash equivalents, and Rewards for “Refer a Friend” programs.

How about rebates received when you use your personal credit card to pay for purchases for your employer? They could be considered taxable income as compensation from your employer.

If the credit card program is considered taxable income to you and exceeds $600, you will normally receive a 1099-Misc form at the end of the year. Even if you fall under this limitation and you have taxable reward income, you still must report this income on your federal income tax return. Good record-keeping is essential; as always, consult a tax professional about these programs.

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.