We’re full swing into tax season, and you’ll either have received — or soon will be receiving — all the necessary forms you need to file your 1040.
If you worked a salaried job last year, you’ll receive your W-2 form. If you’ve done some freelance or contract work, those earnings will be listed on your 1099. But does that cover all your income for 2016?
Think of other money you may have received last year. Like many consumers, you may have cashed in some credit card rewards or signed up for a new card and taken a nice introductory bonus.
Are credit card rewards taxable? If they are and you don’t report them, you could be on the hook to the IRS for unpaid taxes. If they’re not taxable and you report them to IRS, you might pay more than you have to.
The simple answer: Credit card rewards and bonuses sometimes count as taxable income. It all depends on how you earned them.
Here’s what you need to know about credit card rewards before filing your taxes.
Credit card “rebates” can’t be taxed
Conventional credit card rewards — the cash back you receive, or the miles and points you accrue — are generally considered a discount or a rebate by the IRS. They are not considered income, making them tax-exempt.
Say you spent $1,000 at the supermarket with the Blue Cash Preferred card from American Express, which gives 6 percent cash back on grocery shopping. The $60 cash back you receive off your total spending balance is technically a rebate. You wouldn’t need to report that on your tax return even though it’s extra income in your pocket.
Sign-up bonuses that require you to spend a certain amount of money in a specified timeframe to receive a reward may also be tax-free.
For example, on the Chase Sapphire Reserve card, if you spend $4,000 within the first three months of having the card, you’ll receive 50,000 points — that’s estimated to be a value of $750. Cash in those rewards and they won’t need to be reported as taxable income.
The rationale, as some have noted, is that credit card rewards work similarly to a manufacturer’s mail-in rebate, also non-taxable. In the two cases mentioned above, the rewards require you to make a financial transaction (like fulfill a spending minimum) to earn a small portion back.
If you’ve spent money to receive rewards on your credit card, you’re in the clear.
Taxable exceptions to the rule
When no purchase is required to receive a reward, your credit card rewards could be counted as taxable. Technically, because you’ve spent no money to get money, it’s counted as income.
What if you received a cash reward after signing up for a new credit card, savings, or checking account — are credit card rewards taxable then?
It may count as taxable income and you’d receive a 1099 in the mail. That will list the total amount of pre-tax (gross) income that you would declare on your income taxes, just like you would for freelance work.
May is the operative word here, since you may — or may not — receive a 1099 tax form from your credit card issuer, depending on their own rules and regulations. 1099s are usually issued when you’ve earned more than $600 in income, though this may vary when it comes to redeeming rewards.
This could also apply for non-cash rewards, as well — if it’s a sign-up bonus that involves airline miles or other gifts with a cash value, they could qualify to be taxed. Your bank or credit card issuer is obligated to notify you which rewards may be taxable, so if you receive rewards and then a 1099 in the mail, it won’t come as a surprise.
In 2012, Citibank ran a sign-up promotion offering any new customer 25,000 American Airlines frequent flier miles if they opened an account. This caused some ire among users who took advantage of the deal and later received 1099s for them.
To their chagrin, they discovered Citibank applied a cash value exceeding $600 to the sign-up bonus, which customers were unaware of. Subsequently, they sued the bank, alleging the information wasn’t provided up front. The court sided with Citibank.
Business vs. personal credit card rewards
Taxes get a little trickier when it comes to earning rewards on business credit cards. The caveat with business credit card rewards isn’t that they’re taxed, but they can reduce the amount of tax deductions you can make.
Say you charged $700 to your business card, and you received a $20 cash back reward on that purchase. If you want to write off that purchase as a business-related tax deduction, you’d only be able to claim $680 — the $20, while not considered taxable income, isn’t allowed as part of your deduction.
Are credit card rewards taxable?
Here’s what you need to remember this tax season: If you receive any rewards after you’ve made purchases to your card (meaning cash back rewards or points accrued after meeting a spending minimum), you won’t be taxed.
If you receive a bank or card issuer bonus for simply signing up for an account, it may or may not be taxed. You could receive a 1099 whether or not the rewards have exceeded $600, but it all depends on your card issuer.
In this case, it may be advisable to report the income even if you haven’t received the necessary 1099 form, since it can avoid problems with the IRS later.
Before preparing your tax return (and even better, before you open a new rewards card), consult the terms and conditions of your card contract to see what your card provider’s rewards structure is, and their policies on reporting rewards as taxable income.
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