Are Credit Card Rewards Taxable?

| Tedis Baboumian |

Credit cards often offer rewards as incentives, and when you buy large-ticket items, the amount of your rewards can be significant. While you are enjoying this benefit, you may ask, “Are credit card rewards taxable?” The answer is in most cases, they aren’t taxable, but there are exceptions.

Non-Cash Rewards

Some rewards don’t involve any exchange of cash such as travel miles and reward discounts applied as balance credits. Since there was never any cash involved in these rewards, they aren’t taxable. Cash back rewards that are credited directly to your account are considered rebates and don’t have to be reported.

What about points that you can earn and redeem for travel expenses or gift cards? Whenever you have to spend money to earn the rewards, these rewards aren’t taxable. Travel rewards that can be used to save money on travel are considered rebates if you had to spend money to earn them.

Sign-Up Bonuses

If you receive a sign-up bonus in cash from a new credit card account, this may be considered extra unearned income. This type of reward is more like a lottery winning than a rebate. You would have to accrue at least $600 in credit card rewards for them to be taxable. If this happens, you’ll receive a 1099-MISC form from the credit card company and you’ll need to report it on your tax return.

Business Credit Cards

If you’re a business owner, when you sign up for a business credit card, you may get a sign-up bonus or a variety of other different types of rewards. The same rule applies of not having to declare rewards as taxable income as long as you spent money to earn them.

You’ll need to be careful about keeping good records of travel expenses. If the amount you had to pay was reduced by credit card rewards, you can only declare the amount you actually paid as a business expense.  The same thing applies to business purchases. If you spent $950 on office equipment and your cost was reduced by a $20 credit card reward, you can only deduct the net amount of $930 as a business expense, not $950. If you donate rewards you’ve earned to charity, you can’t use them as a deduction.

Taking Care of Your Credit

Qualifying for the rewards and benefits that are offered by credit card companies depends on having good credit. The most important thing to do for good credit is always pay your bills on time. A single payment that’s more than 30 days late can damage your credit for seven years. Avoid borrowing more than you need or more than you can pay back.

Even if you do everything right when it comes to protecting your credit, you could run into problems if there are any errors on your credit report. Check your credit report to make sure there’s no inaccurate information. If there are any items that need to be disputed, Dovly can help. Dovly is an AI credit engine that can find and fix credit report errors. Try it risk-free with our free membership tier.

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