Are Credit Card Rewards Taxable?

Are Credit Card Rewards Taxable?

August 28, 2013         Written By Lynn Oldshue

Credit card rewards are a wonderful bonus for using your card. Over half of the credit cards on the market today have some type of reward program. These rewards can turn into free money that you get to use however you want.

Before you bask in the glory of your rewards, you need to think about one major factor that could crush your excitement: taxes. Yes, just like casino or lottery winnings, your credit card rewards may be subject to taxes. Are credit card rewards taxable? Sometimes.

When Credit Card Rewards Are Not Taxable

For the most part, the standard earn-as-you-go credit card rewards are not considered taxable. This applies to cash back, airline miles and store credit rewards. If you spend thousands of dollars a year on your card, you can use these significant rewards without having to worry about reporting anything. That money is yours to keep.

When Credit Card Rewards Are Taxable

But credit card rewards are taxable if it exceeds $600 and when it is the result of a promotional offer that a bank puts out for new customers. A number of banks are doing this because of the competition for the best customers which, in the case of credit cards, is people with outstanding credit scores. The banks want to entice people with excellent credit to sign up for cards, so they will offer special signup bonuses if you spend X amount of money on the card in Y amount of time. If you have a rewards card, you have probably seen this.

The IRS only expects to hear about your initial bonus if it exceeded $600. At that point, they are considered extra income for your family. Even the best bonuses on the market usually only equate to a couple hundred dollars in value, so it is very unusual to see a sign-up bonus exceeding $600.

Growing Competition

Even though most credit card rewards aren’t taxable, banks are getting more competitive to find customers with excellent credit scores. In the past few years, some issuers have offered sign-up bonuses. Banking competition is fierce right now, and most banks are still trying to recover from the financial blow they suffered a couple years ago.

The offer does not have to be cash in order to be subject to taxation. If the value of a trip or merchandise exceeds $600, you may have to be pay taxes on that reward. So an offer of a couple free airline tickets may be valued over $600. This type of reward may be rare, but you should be aware of the potential consequences.

Reporting the Rewards to the IRS

Now that you know that credit card rewards are taxable in some cases, what do you do if your initial rewards have possibly exceeded $600? You could contact the IRS or your credit card company, but chances are you’ll just be on hold for a while. The best way is to wait to see if a 1099 form comes in the mail at the first of the year. If you do not receive one, then the bonus wasn’t valued over $600 and wasn’t reported to the IRS. If you do receive a 1099, you obviously have to factor that into your personal taxes.

 

The information contained within this article was accurate as of August 28, 2013. For up-to-date information on any of the terms, cards or offers mentioned above, visit the issuer's website. Many of the offers on this article are from our affiliate partners, and LowCards.com may be compensated if you take action with any of our affiliate partners.

Review LowCards.com Editor’s Top Cards!

2020 Top Credit Cards by Category
Featured Fair Credit Card
Reflex Mastercard® Credit Card
EDITOR RATING
Featured Fair Credit Card
Reflex Mastercard® Credit Card

Applying for this card will securely direct you to the issuer's website.

Top Features: All credit types welcome to apply!

Featured Secured Card
Assent Platinum 0% Intro Rate Mastercard Secured Credit Card
EDITOR RATING
Featured Secured Card
Assent Platinum 0% Intro Rate Mastercard Secured Credit Card

Applying for this card will securely direct you to the issuer's website.

Top Features: Intro APR Offer on Purchases, No Annual Fee For First Year

Featured Bad Credit Card
First Digital NextGen Mastercard® Credit Card
EDITOR RATING
Featured Bad Credit Card
First Digital NextGen Mastercard® Credit Card

Applying for this card will securely direct you to the issuer's website.

Top Features: Reports to all three credit bureaus, perfect credit not required for approval

Featured Good Credit Card
Petal® Visa® Credit Card
EDITOR RATING
Featured Good Credit Card
Petal® Visa® Credit Card

Applying for this card will securely direct you to the issuer's website.

Top Features: No fees whatsoever. No late fee, international fee, annual fee, or any-other-kind-of-fee, fee


lynn-oldshue

About Lynn Oldshue

Lynn Oldshue has written personal finance stories for LowCards.com for twelve years. She majored in public relations at Mississippi State University.