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 those rewards on your tax return?
Whether credit card rewards are taxable depends on how you earned the rewards. Here’s everything you need to know about the tax regulations surrounding 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
- Rewards Points or Miles – Travel credit cards often earn points or miles which can be redeemed for travel. Some credit card issuers allow you to redeem these points for a variety of options, such as a statement credit, cash back, or booking travel. spend.
- Cash Back – Cash back credit cards usually have a straightforward earnings rate and typically don’t offer a boosted value from your points on travel redemptions. These cards make sense for infrequent travelers or those who prefer an uncomplicated rewards system.
- Sign-Up Bonuses – A sign up bonus is one of the incentives that credit card issuers have to get new customers for their credit cards. Typically, you’ll need to spend a certain amount of money within the specified timeframe to earn the bonus.
Are Credit Card Rewards Taxable?
Whether you need to pay taxes on your credit card rewards depends on the situation. However, the distinction lies in how the rewards are earned, not how they’re redeemed. Credit card rewards aren’t taxable as long as you spend something to earn them.
- Non-Taxable Rewards – Points, miles, and cash back rewards that you earn from making purchases with your credit card are not taxable. The IRS considers these rewards to be a discount.
- Taxable Rewards – Rewards are taxable if you received the incentive without having to spend anything. This is where it gets tricky. When you do accept a bonus or reward and you didn’t have to do anything to earn it, it’s qualified as a gift. The IRS considers certain types of gifts to be taxable.
Keep in mind that if you use a business credit card to make purchases that are tax-deductible, 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.
If the reward exceeded $600, you would receive a 1099-MISC from the credit card issuer to include with your tax return. However, even if you don’t receive a 1099 for it, that doesn’t mean that you don’t have to pay taxes. There’s a catch-all line for reporting other income on your tax return and it’s your responsibility to include any bonuses or rewards that you received without having to spend any money.
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