With cash-back rates getting as high as 6% nowadays,credit card rewardscan result in some significant bucks, especially if you buy a big-ticket item. That's great for you as a consumer—but there's also a lot of ambiguity for you as a taxpayer.
Unfortunately, the Internal Revenue Service (IRS) doesn't say much directly on the treatment ofcredit card rewards. But in general, any income a taxpayer receives is subject to tax by the government. The type of rewards and the way in which you receive them can be the main factor for determining whether they are considered taxable.
In some cases, the rewards may be viewed as a rebate or discount, not as income. For example, a rewards program for using your credit card is treated as if it were actually a post-purchase rebate. However, there are some credit card reward programs that offer large sign-up bonuses—which the IRS may end up counting as taxable income.
Key Takeaways
- Whether credit card rewards are taxable as income depends on how the rewards are received.
- If earned through the use of the card, like a cash-back bonus, the rewards are viewed by the IRS as a rebate and not taxable income.
- Rewards provided as an incentive just for opening an account (without you spending any money) could be considered taxable income.
- For rewards totaling over $600 annually, you will receive a form 1099-MISC. Even if your rewards don't surpass $600, you are still required to report the income and pay taxes on the appropriate amount.
- Rewards earned on a business credit card may affect the amount you can deduct from those business expenses.
The situation is slightly different if the purchase is for business purposes, rather than personal ones. If you have abusiness credit card, a good general rule of thumb is that any rewards on those business purchases should be subtracted from their overall cost—and thus, the amount that you can deduct from your taxes.
So it's not technically boosting your taxable income, but the net result does increase your tax burden.
Types of Rewards That Are and Are Not Income
Often, the kind of reward received dictates its taxable status.
Many credit card reward programs never involve an exchange of cash. Types of common credit card rewards that are treated in this manner include travel miles, accumulated points toward future purchases, and reward discounts automatically applied as balance credits. So, without cash being directly received, it's generally safe to say these sorts of rewards are non-taxable.
Sign-up bonuses for getting a new credit card can possibly be different. Some of these bonuses do not require that you make any purchases or charge any amount to your card. If these sign-up bonuses are given to you directly in cash for just opening the account, then they might be taxable—as extra unearned income. They can't be considered a refund, since you didn't actually spend any of your own money.
So, where do cash-back reward programs fit in? It varies. If a cash-back reward is credited directly to your credit card account, then the income is generally considered a nice rebate that comes with the benefit of using the card. If you actually receive a cash-back check directly, though, it gets a little trickier: It probably also would be considered a type of rebate, but it could technically count as income.
How Credit Card Rewards Are Taxed
Broadly, concerns over your credit card rewards getting taxed will typically arise when cash is actually paid to you. This scenario occurs with a sign-up bonus and with some cash back programs. Generally, a sign-up bonus payout would be more comparable to a lottery winning while a cash-back payout would be like a rebate.
Another key factor in credit card rewards being taxable: how much money you actually accrue in a year. If you earn $600 or more in rewards, you will receive a 1099-MISC from your credit card company. But even if you don't receive the form because you earned less than $600 in value, you are still required to report the income and you may have to pay taxes on the appropriate amount (in the scenarios of sign-up bonuses and cash back programs, as explained above.)
1099-MISC and Credit Card Rewards
If you receive IRS Form 1099-MISC from a credit card company, the taxability question is answered for you. This IRS form, for miscellaneous income, is only issued (with copies to you and to the IRS) when $600 of income is accumulated from taxable income payouts. So, if you receive the 1099-MISC, then you must report the payouts as income and pay tax.
In short, if you receive a 1099-MISC form in the mail as part of arewards program, do not ignore it. Even if you believe that your income should not qualify as taxable, you are better off talking to a tax expert. The IRS has become increasingly stringent on tracking income from these sources, and you do not want to subject yourself to a tax penalty because you failed to report your credit card rewards appropriately when a 1099-MISC was issued.
Real-World Example of Cash Rewards and Taxation
A real-life example of the potentially tricky, taxable nature of credit card rewards came to light in November 2021. The Wall Street Journal reported that the Justice and Treasury Departments were investigating American Express, due to a campaign that involved 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 strategy, which ran from 2018 to 2020 and targeted small business owners and sole proprietors/professionals who shied away from accepting AmEx cards, ran like this: A company would use American Express' wire service to pay vendors, suppliers, or even employees. It could then deduct the cost of using the service—fees of 1.77% to 3.5% per transaction—as a business expense on its tax return. Also, AmEx employees said, the business owner could earn reward points for the wire transactions (similar to a credit card purchase), transfer the points to a personal AmEx Platinum Charles Schwab card—and convert them to actual cash, at 1.25 cents per point.
It's that last part that potentially gets problematic. In general, the IRS does not consider rewards points from personal purchases as income, but as a discount—unless you actually receive them in the form of cash, as these small business owners were being encouraged to do. The fact that two different entities are involved—the points-accruing purchase was made by a company, but then the reward points were cashed out by an individual—also muddies the waters, making the reward seem more like unearned income than a rebate.
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" after admitting that it had "failed to uphold... [its] values and had positioned certain products inappropriately, specifically with respect to tax benefits." A few months later, in April 2022, it was reported that the IRS had launched its own probe into the matter.
The American Express story should serve as a reminder to tread carefully when playing with card-related fees and rewards for tax purposes. It could also prompt the IRS to introduce changes and finally provide more specific information about the taxation of credit card rewards.
Advisor Insight
Donald P. Gould
Gould Asset Management, Claremont, CA.
It depends on how the rewards are received. Most rewards are earned through the use of the card itself; for example, receiving one reward point for every dollar spent on a card. These rewards are considered rebates. However, rewards provided as an incentive for opening an account could be considered taxable income.
Do You Have to Claim Credit Card Rewards as Income?
The IRS doesn’t specifically address this topic, leaving it widely open to interpretation. Most tax experts agree that credit card rewards earned through the use of the card are non-taxable rebates and that you should be fine as long as you spend money to get something. Based on this logic, it's only when there's an actual exchange of cash, such as in the case of a sign-up bonus, that you may need to declare something.
Do You Get a 1099 for Credit Card Rewards?
If you receive a 1099-MISC from the credit card company, then you may have to pay taxes. Don’t bury your head in the sand or jump to conclusions. Get advice from a tax expert and take it from there.
Can You Pay Taxes With a Credit Card?
Yes, the IRS is happy for people to pay taxes with a credit card and has authorized three companies to process these payments. However, be aware that there are fees to pay for this service.
The Bottom Line
The IRS covers pretty much every money-making activity on its website. However, one notable exception that it doesn’t specifically address is credit card rewards.
Very little has been published by the government on the tax treatment of credit card rewards, making it difficult to know where it stands on this issue. Generally speaking, it can be interpreted that credit card rewards earned through the use of the card are rebates rather than taxable income. However, that line starts to blur once the rewards surpass $600 in a year or when a sign-up bonus is paid out in cash to open an account.
If in doubt, it’s better to ask. Speak to a tax expert if you are unsure or consider calling the IRS directly.
Correction—Jan. 30, 2023: A previous version of this article wrongly stated that credit cards rewards for less than $600 in value are not subject to taxes. Cardholders are still required to report the income and pay taxes on the appropriate amount regardless if the issuer provides a 1099-MISC form.
