Are Credit Card Rewards Taxable?

Are Credit Card Rewards Taxable?

April 20, 2020         Written By Heaven Speirs

Credit card rewards have become increasingly lucrative over the years. Card issuers must continually strive to stay ahead of the competition, giving cardholders even more ways to earn bonuses for their spending. There is only one problem though: some credit card rewards are taxable. It is important to know which rewards can be taxed so you can remain in good standing with the IRS. Let us take a look at which credit card rewards are taxable and how to file rewards on your taxes.

Most Credit Card Rewards Are Not Taxable – Here is Why

For the most part, the standard earn-as-you-go credit card rewards are not considered taxable. The IRS treats the rewards as a discount, not income. This applies to cash back, airline miles, store credit rewards, loyalty points, gas rewards, and more. It is the same principle as buying something when it is on sale. You do not have to report the difference between the sale price and the original price as ‘income.’ You are simply getting rewarded for the money you spend.

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Even if you spend thousands of dollars a year on your card, you do not have to report your credit card rewards as income. The rewards are yours to keep at no consequence. Continue using and repaying your card as usual.

The Rare Moment When Credit Card Rewards Are Taxable

There is only one situation in which credit card rewards are considered taxable, and it is rare. If a credit card offers a sign-up bonus without a minimum spending threshold, the initial bonus is treated as income. Most cards have a spending level you have to meet before earning the rewards. Example: Spend $3,000 in the first 90 days and earn $150 in cash back. This ensures that the card issuer gets some sort of return for the rewards. In the rare instance that your card does not require money spent for a sign-up bonus, the rewards are considered taxable.

Note that if you sign up for a bank account and receive a bonus for making a deposit, that bonus may be taxable. This is different than a credit card sign-up bonus, where you must spend money in order to ‘earn’ money. The bonus from the bank is essentially free funds, just like income. Banks are diligent about sending tax forms for these bonuses, so you should receive a form in the mail. Ask about the taxability of any bonus you sign up for with a banking institution.

How Credit Card Rewards Impact Business Taxes

If you own a business, your credit card rewards may affect your tax-deductible expenses. The rewards are not considered income, but they do reduce the amount of deductions you take. For example, let’s say that you have $1,000 in travel expenses for a business trip. You have $300 in cash back on your credit card, which you use to cover part of the costs. That leaves you with an out-of-pocket expense of $700. You would only be able to write-off $700 for that trip, not the full $1,000. Nevertheless, the $300 in direct savings should have more value than the corresponding deduction amount.

Tax Forms for Credit Card Rewards

If your credit card rewards fit into the taxable category, you should receive a 1099 from your credit card issuer. You will receive a Form 1099-MISC if you received more than $600 in rewards, or a Form 1099-INT if the rewards were less than $600 but more than $10. If you do not receive a Form 1099 for taxable credit card rewards, you should still report them as income on your tax return. Only do this for initial bonus rewards that required no spending to achieve.

What If My Sign-on Bonus Is Not Cash Back?

With cashback rewards, it is easy to assign value to them. Get a $50 sign-up bonus for a new card, and you know it is worth $50. Other types of credit card rewards may not be as easy to pinpoint the value of. Nevertheless, they are considered taxable if they are accrued before you spend money on the card. In that case, you need to know the estimated value of the rewards. If 20,000 airline miles are worth $200, that is the value you will report to the IRS. Again, you only need to report credit card rewards as income if you receive them without spending money on your card. Your standard airline miles are not taxable. 

Is Forgiven Credit Card Debt Taxable?

If your credit card company forgives some or all of your debt, you should receive a Form 1099-C. This form is for Cancellation of Debt Income, and it turns the forgiven debt into taxable income on your tax return. For instance, if you owed $5,000 to your credit card company and negotiated a debt payment of $2,000, the $3,000 that the company forgave would be considered income and thus subject to tax. You are only required to report this if the forgiven debt is over $600.

The exception to this rule is if your credit card debt is forgiven through bankruptcy. You do not have to pay taxes on debts discharged during bankruptcy. If you settle with your credit card company before bankruptcy, then you may still owe taxes on the forgiven debt.

How to Report Credit Card Rewards on Your Taxes

If your credit card rewards are taxable and you receive a 1099-INT or 1099-MISC from your credit card company, report the income in the taxable interest portion of Form 1040. This is right below the area where you list your wages and information from your W-2. The rewards will be calculated into your adjusted gross income and taxable income as a result. If you work with a professional tax preparer, they can handle these steps for you.

Should I Pay My Taxes with a Credit Card?

There are several potential benefits to paying tax debt with a credit card. If you have a rewards card, you could earn a hefty set of rewards because of the high spending volume. You also eliminate the worry of tax debt and avoid late fees associated with it. However, this is only a viable option if you have a low interest rate or can repay your tax debt in a timely manner. Otherwise, the increased credit card debt will cost more in interest than the money you save in late fees.

Learn more: Should I Pay My Taxes with a Credit Card?

The information contained within this article was accurate as of April 20, 2020. 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.

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heaven

About Heaven Speirs

Heaven Speirs is a contributing writer for LowCards.com. She remains up-to-date with the latest developments in the credit card industry and the financial sector as a whole. Heaven has over 10 years of experience in online journalism, the bulk of which has been focused on personal finance. Heaven attended Oklahoma State University, where she discovered her talent for research and content creation. In her spare time, Heaven enjoys painting, playing poker, and spending time with her husband and three dogs.