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Are My Credit Card Rewards Taxable?

Aug. 18, 2014
Credit Cards, Rewards Credit Cards
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The U.S. tax system might as well be in Latin for a large portion of Americans. With all its nuances and caveats, it may be difficult for you to determine what you do and don’t have to report on your 1040 tax return. For instance, have you ever wondered if your credit card rewards should be reported and taxed as income? Here’s what you need to know!

Are my credit card rewards considered income for tax purposes?

In general, credit card rewards are viewed by the IRS as a discount, not income. So if you’re getting 2% cash back, that would be considered a 2% discount on your purchases. Discounts aren’t taxable, so you don’t need to keep track of your credit card rewards for tax time. However, this is only the case for most credit card issuers, not all.

With the introduction of large sign-up bonuses on credit cards, some issuers have begun adding a disclosure to the credit card agreement that your rewards may be reported as income to the IRS, generally if you get over a certain dollar amount back in rewards. If this is the case, you’ll receive a 1099 MISC form that you’ll need to report the rewards as income for tax purposes. Check your credit card agreement to see if your rewards will be affected.

Also, understand that this could apply to more than cash rewards. Travel rewards can be quantified and reported in a similar manner to the IRS. If your issuer doesn’t disclose that your rewards will be reported to the IRS and you don’t receive a 1099, you don’t have to worry about reporting your cash or travel rewards.

How much would I have to pay in taxes if my issuer reports?

Don’t worry, you’ll still get to keep most of your rewards if you’re issued a 1099. In the United States, we have a progressive tax system, which means the tax percentage increases as the taxable base increases. Simply put, those who make more generally pay a higher amount than those who make less.

You can look at these pages to determine your own federal tax rate and state tax rate. You also may have a local tax rate — this will depend on your city or county.

Business purchases are another animal

While most personal credit card rewards won’t be taxed, business rewards are another animal entirely. If your small business purchases an item for $500, and gets a credit card rebate of $10, only $490 can be deducted for the cost of the item as a business expense. The $10 isn’t necessarily considered income, but it is a reduction of your deduction.

However, if you’re using your personal credit card to make business-related purchases and then getting reimbursed by your employer, it won’t be considered income by the IRS, according to Lindquist LLP. This means the IRS won’t pursue you for underreporting income by earning rewards on business-related purchases at this time.

Four takeaways: (1) In general, you don’t need to report your credit card rewards as income for tax purposes. (2) The exception to this is if your credit card issuer states on your agreement that rewards will be reported and issues you a 1099. (3) If you receive credit card rebates on business purchases, you’ll have to subtract them from the cost of your purchase and deduct the balance. (4) The IRS currently won’t pursue you for underreporting income if you use your personal card to earn rewards on business expenses that will be reimbursed by your employer.

1040 tax form image via Shutterstock