Are Credit Card Rewards Considered Taxable Income?

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Are Credit Card Rewards Considered Taxable Income?

With cash-back rates reaching as high as 6% these days, credit card incentives may add up to huge sums, particularly if you purchase a big-ticket item. Great for you as a consumer, but it creates a lot of uncertainty for you as a taxpayer.

Unfortunately, the Internal Revenue Service (IRS) is silent on the subject of credit card incentives. However, in general, the government taxes all income received by a taxpayer. The sort of incentives and how you get them may be the most important factors in deciding whether they are taxed.

In certain circumstances, the benefits may be considered a refund or discount rather than revenue. A rewards program for using your credit card, for example, is considered as if it were a post-purchase refund. However, certain credit card incentive programs give hefty sign-up bonuses, which the IRS may consider taxable income.

Key Takeaways

  • The receipt of credit card incentives determines whether they are taxed as income.
  • If received via card usage, such as a cash-back incentive, the IRS considers the benefits to be a rebate rather than taxable income.
  • Rewards given as an incentive just for creating an account (without you spending any money) may constitute taxable income.
  • Taxes are usually levied on prizes totalling more than $600 per year, for which you’d get a Form 1099-MISC.
  • The amount you may deduct for company expenditures may be affected by rewards received on a business credit card.

If the acquisition is for business rather than personal reasons, the situation is somewhat different. If you have a company credit card, a good general rule of thumb is that any points earned on business purchases should be deducted from the total cost—and hence the amount you may deduct from taxes.

So, although it doesn’t technically raise your taxable income, the total consequence increases your tax burden.

Types of Rewards That Are and Are Not Income

Often, the kind of reward received determines whether or not it is taxed.

Many credit card incentive schemes do not require the exchange of cash. Travel miles, earned points for future purchases, and incentive reductions immediately applied as balance credits are examples of popular credit card rewards that are processed in this way. So, as long as no cash is collected, these types of gifts are normally exempt from taxation.

Sign-up incentives for obtaining a new credit card may vary. Some of these benefits do not need any transactions or charges to your credit card. If you get these sign-up incentives in cash for just creating an account, they may be taxed as unearned income. They cannot be considered a refund since you did not spend any of your own money.

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So, how do cash-back incentive schemes fit in? It differs. When a cash-back incentive is deposited straight to your credit card account, it is often seen as a lovely rebate that comes with the privilege of using the card. However, if you get a cash-back check directly, the situation becomes more complicated: it is likely to be regarded a form of refund, but it might theoretically qualify as income.

How Credit Card Rewards Are Taxed

Concerns about credit card rewards being taxed often emerge when cash is actually given to you. This happens with sign-up bonuses and later with cash back schemes. In general, a sign-up bonus payment is more akin to a lottery win, while a cash-back payout is more like to a rebate.

Another important consideration in whether or not credit card rewards are taxed is how much money you really accumulate in a year. The magic number is $600. Taxes, like income in general, could only apply to amounts larger than that.

It’s unlikely to happen. Many cash-back incentive schemes provide little more than 1% or 2% cash-back. To meet the $600 barrier using a 1% cash-back program, you would need to spend $60,000 in a year. To meet the $600 requirement using a 2% cash-back program, you would need to spend $30,000 in a year.

Even if you spend this much and immediately get the $600-plus cash-back benefits, the rewards are still like a refund to you since they are related to purchase activity.

1099-MISC and Credit Card Rewards

The taxability issue is answered for you if you get a 1099-MISC from your credit card company. IRS Form 1099-MISC: Miscellaneous Income is only issued (with copies to you and the IRS) after $600 in taxable income distributions aggregate. If you get a 1099-MISC, you must record the payments as income and pay taxes on them.

To summarize, if you get a 1099-MISC form in the mail as part of an incentive program, do not disregard it. Even if you feel your income should not be taxed, you should consult with a tax professional. The IRS has grown more severe in monitoring revenue from various sources, and you do not want to face a tax penalty because you did not properly report your credit card rewards when a 1099-MISC was sent.

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Real-World Example of Cash Rewards and Taxation

In November 2021, a real-life illustration of the potentially difficult, taxable nature of credit card incentives surfaced. The Justice and Treasury Departments were investigating American Express, according to the Wall Street Journal, because of a campaign advising business owners to use AmEx’s fee-based wire service, deduct the costs as a business expense, and then treat the cash rewards accrued from the transaction on a personal credit card as tax-free.

The campaign, which lasted from 2018 to 2020 and targeted small business owners and sole proprietors/professionals who refused to accept AmEx cards, worked as follows: the firm would pay vendors, suppliers, or even staff via American Express’ wire service. It may then deduct the cost of utilizing the service—fees ranging from 1.77% to 3.5% per transaction—on its tax return as a business expenditure. Additionally, AmEx workers said that the company owner may receive reward points for wire transfers (similar to a credit card purchase), transfer the points to a personal AmEx Platinum Charles Schwab card—and convert the points to real cash at 1.25 cents per point.

That final aspect has the potential to be troublesome. In general, the IRS considers rewards points from personal purchases to be a discount rather than income—unless you obtain them in the form of real money, as these small company owners were urged to do. The involvement of two separate entities—the points-accruing transaction was made by a firm, but the reward points were paid out by an individual—also muddies the waters, making the award seem more like unearned income than a refund.

After admitting that it had “failed to uphold… [its] values and had positioned certain products inappropriately, specifically with respect to tax benefits,” American Express discontinued the practice in early 2020, hired lawyers to conduct its own investigation, and later took “actions to change products, policies, and personnel.” A few months later, in April 2022, it was reported that the IRS had launched its own investigation into the matter.

The case of American Express should serve as a lesson to be cautious when dealing with card-related fees and benefits for tax reasons. It may also drive the IRS to make adjustments and ultimately disclose more detailed information on credit card rewards taxes.

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Advisor Insight

Donald P. Gould
Gould Asset Management, Claremont, CA

It is determined by how the incentives are obtained. The majority of rewards are earned through using the card itself; for example, collecting one reward point for every $1 spent on a card. These incentives are known as rebates. Rewards supplied as an incentive for creating an account, on the other hand, may be deemed taxable income.

Do You Have to Claim Credit Card Rewards as Income?

The IRS does not address this matter precisely, leaving it up to interpretation. Most tax professionals believe that credit card incentives obtained via card usage are non-taxable refunds and that you should be good as long as you spend money to get anything. According to this reasoning, you may need to report anything only when there is an actual exchange of currency, such as in the case of a sign-up bonus.

Do You Get a 1099 for Credit Card Rewards?

If you get a 1099-MISC from your credit card provider, you may be required to pay taxes. Don’t stick your head in the sand or make hasty assumptions. Seek the assistance of a tax specialist and go from there.

Can You Pay Taxes with a Credit Card?

Yes, the IRS accepts credit card payments for taxes and has allowed three firms to handle them. However, keep in mind that there are expenses associated with this service.

The Bottom Line

On its website, the IRS covers almost every money-making activity. Credit card incentives are one significant exception that it does not directly address.

The government has released very little information on the tax treatment of credit card rewards, making it impossible to tell where it stands on issue. In general, credit card incentives gained via card usage may be viewed as refunds rather than taxable income. However, the boundary begins to blur when the benefits exceed $600 in a year or when a cash sign-up bonus is handed out to join an account.

When in doubt, it’s best to inquire. If you are uncertain, consult a tax professional or contact the IRS immediately.

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