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Are my credit card rewards taxable?

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You might have happily reaped the bounty of credit card rewards, considering issuers have been handing out this largesse liberally in the last few years. Come tax season, though, you may be wondering if you owe any taxes on such rewards.

With the process of filing tax returns being as enticing as the prospect of a visit to a dentist for many people, this may still be a taxing question to you. How does the IRS treat credit card rewards for tax purposes? Let’s take a look at when card rewards are taxable versus when they are not taxable, and what tax filers can look out for in order to ensure their rewards aren’t taxable.

When credit card rewards are taxable

Airline rewards miles could be taxable

What if a card issuer awarded you airline miles? If they were awarded on the basis of a purchase, typically frequent flyer miles, then they would still enjoy the tax exemption.

However, if your issuer awarded you bonus miles merely for opening a credit card, since you did not have to purchase anything to qualify and therefore are not receiving a rebate, the IRS wouldn’t consider that kosher. So you would have to pay taxes on such reward miles.

Sign-up bonuses could be taxable

Keep in mind, the average sign-up bonus that offers new cardholders $300 when they spend $1,000 in the first three months, or whatever it may be, is not considered taxable income. You are meeting a spending requirement in order to earn that sign-up bonus.

However, if an issuer awarded you bonus rewards just for opening an account or for any other reason without requiring any purchase or minimum spending amount to qualify, the value of such bonus is taxable.

Credit card referrals could be taxable

The same applies to certain credit card referrals. If you receive a cash reward when you refer someone to sign-up for a new card, this is technically considered taxable income as well.

As Scott Hallberg, tax director at Calibre CPA Group, explains in an online post, in case the value of such bonus miles awarded to you is $600 or more, the IRS requires the issuer to report this as income and also send you a 1099-Misc form. The credit card company will determine the value of the bonus miles. This should be somewhere embedded in the fine print of the disclosures it sent you. This holds good for referral bonuses, too.

When credit card rewards are not taxable

If your credit card issuer offered you rewards for making purchases, the IRS considers the rewards to be a form of rebate on the purchases. Thus, the cost of the purchase is reduced and the rewards are not considered taxable income.

This is akin to a store offering you, for instance, a $10 mail-in rebate after you purchase a $100 toaster. The rebate is not considered income to you, it just helps make the product more affordable and drives sales for the business.

How do I know if I owe taxes on my rewards?

Unless you are racking up an enormous amount of rewards, odds are you don’t owe any taxes. It doesn’t matter if your rewards come in the form of cash back, miles or redeemable points, as long as you meet a spending requirement to get there, you are in the clear. You could be earning cash back on one credit card and points and miles on another, you are still in the clear. It doesn’t matter how much you are earning in rewards. It matters how you got there.

Tread carefully when you come across credit cards that offer a bonus without spending money (or credit card referrals that offer rewards when you sign-up new cardholders) because that is where things can get complicated.

These “no strings attached” offers may be considered taxable. While an offer that hands out a sum of money just for signing up for a new card isn’t very common, these types of offers are out there. The same goes for referrals. If you are offered money in exchange for a referral who opens up a new card, you are technically required to count these types of exchanges as income.

How to avoid taxes on your rewards credit card

Most credit card rewards (no matter what form they may come in) are not taxable in the eyes of the IRS. They see these types of transactions as discounts, not taxable income. As long as you’re seeking offers that allow cardholders to earn rewards or a sign-up bonus when you meet certain purchase requirements, you are in the clear.

The bottom line

You can and should take advantage of the bounty available from the best rewards cards. Most credit card rewards are not taxable. Be wary, however, of “no strings attached” cash offers. You don’t want to be hit with any surprises come tax season. If you’re still unsure whether or not you owe taxes on your rewards, seek assistance from a tax professional or use a tax software program.

Written by
Poonkulali Thangavelu
Senior Reporter
Poonkulali Thangavelu is a senior writer and columnist at CreditCards.com and Bankrate, addressing debt and credit card-related legal and regulatory issues.
Edited by
Associate Editor
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Part of  Introduction to Rewards Credit Cards