If you’re a credit card rewards enthusiast, you need to know when those rewards are taxable.
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With the high rewards rates available through the best credit cards and the big sign-up bonuses that are available, you could conceivably score a significant amount of rewards through a credit card. That makes it important to know whether those credit card rewards are taxable.
If you fail to claim any type of income on your tax return, it can lead to trouble with the IRS and penalty fees. Although credit card rewards usually aren’t taxable, this isn’t always the case.
Are credit card rewards taxable?
Credit card rewards can be taxable, but only if you didn’t need to spend any money to receive those rewards. Since most rewards require spending on your part, the majority of consumers won’t need to worry about much, if any, of their credit card rewards being taxable.
When you earn credit card rewards for spending money, the IRS considers that a discount on your spending and not income. Here are the types of rewards you wouldn’t need to claim on your taxes and some examples of each:
- Rewards on regular spending -- If your card earns 1.5% cash back or 2 points per $1, that isn’t taxable.
- Sign-up bonuses with a spending minimum -- When you need to spend money to earn a sign-up bonus, whether it’s $500 in three months to earn a $150 bonus or a 50,000-point bonus after your first purchase, those aren’t taxable.
- Special bonus offers for making certain types of purchases -- If your card issuer offers you a limited time bonus for a specific type of purchase, such as purchases at the mall or through a mobile payment app, that won’t be taxable.
For credit card rewards that aren’t tied to any spending on your part, the IRS will consider it income, making it taxable. The most common examples of this include:
- Referral bonuses -- If you get a $100 cash-back bonus or a 10,000-point bonus every time someone applies for a credit card through your referral link, that’s considered income.
- Sign-up bonuses without a spending minimum -- If you receive a sign-up bonus upon approval for a credit card without needing to buy anything, that’s taxable.
When you do have taxable credit card rewards, your card issuer will send you a 1099-MISC form for you to claim on your taxes.
What is the value of credit card rewards for tax purposes?
With cash-back credit cards, it’s obvious what the value of your credit card rewards will be for tax purposes. If you have $200 in taxable cash-back rewards, that’d be the equivalent of $200 in income.
It’s not so clear-cut with travel rewards cards that earn points. The most common valuation that card issuers go with is $0.01 per point, meaning 10,000 points would be the equivalent of $100 in income. That’s not always the case, though. Hilton Honors points are one example of when points are valued differently, as they’re counted at $0.0067 per point for tax reporting purposes.
Fortunately, your card issuer will calculate this for you and include the exact amount on your 1099-MISC form.
How to handle taxable credit card rewards
If you receive a 1099-MISC form from your card issuer, you have two options:
- Contact them to complain and see if they’ll issue you a corrected form listing less or no income.
- Include the income on your taxes.
Some consumers have reported that they’ve gotten their card issuer to send them a corrected form listing $0 of income. Since this could save you some money on your taxes, it’s worth a shot.
If that doesn’t work, then you’ll need to include the income listed on the form or risk drawing the ire of the IRS. Specifically, this income would go on Line 21 of your Form 1040 personal tax return. With any of the popular tax preparation software, you’ll be able to add 1099-MISC forms as you do your taxes.
Knowing what to expect with taxes and credit card rewards
The good news is that most of us won’t have to claim our credit card rewards as income on our taxes. Any reward that requires you to spend money to earn it isn’t classified as income, and most credit card rewards require spending of some sort.
Should you end up with any taxable credit card rewards, your card issuer will notify you with a 1099-MISC form. You can try to get them to reduce it, but if that doesn’t fly, you’ll just need to bite the bullet and include it on your taxes.