Key takeaways

  • If your credit card issuer offers you rewards for making purchases, the IRS considers the rewards earned to be a form of rebate and not as taxable income
  • In some cases, if you’re awarded credit card rewards that are worth $600 or more, the IRS requires you to report this as income on a 1099-Misc form
  • If an issuer offers you bonus rewards with no strings attached, these offers may be taxable

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.

How does the IRS treat credit card rewards for tax purposes? With the process of filing tax returns being as enticing as the prospect of a visit to the dentist for many people, this may still be a taxing question for you. Let’s take a look at when credit 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 could be taxable

If a card issuer awarded you airline miles or points on the basis of a purchase, then the rewards would still enjoy the tax exemption. However, if your issuer awarded you bonus points or miles merely for opening a credit card, the IRS wouldn’t consider that kosher since you did not have to purchase anything to qualify and therefore are not receiving a rebate. So you would have to pay taxes on such rewards.

Sign-up bonuses could be taxable

Keep in mind that the average sign-up bonus — which may offer new cardholders $200 when they spend $1,000 in the first three months, for example — is not considered taxable income since 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 rewards would be 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 Scott Hallberg, senior tax director at Calibre CPA Group, explains in an online post, in the event that the bonus points or miles awarded to you are worth $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 rewards. This should be somewhere embedded in the fine print of the disclosures it sent you.

When credit card rewards are not taxable

If your credit card issuer offers 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.

For instance, this is akin to a store offering you 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 you know if you owe taxes on your rewards?

Unless you are racking up an enormous amount of rewards, odds are you won’t owe any taxes. It doesn’t matter if your rewards come in the form of cash back, miles or 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 and you’ll still be 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. This is because 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 referring someone to open 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 you 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 credit cards. Most credit card rewards are not taxable, but be wary 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.