Maybe you haven’t thought about it before, but some of your credit card rewards may be subject to tax. The United States Internal Revenue Service has different requirements for the rewards issued on your credit card spending depending on how they’re issued. It’s important to remain well-informed so that you don’t end up with surprises after filing an incorrect tax return, and below are tips to help you avoid paying tax on your credit bonus.
There are two ways that credit companies operate their rewards; one is liable for tax and the other is not.
Rewards for making purchases are not taxable
If you are offered rewards for purchase transactions, which is the most common scenario, the value is considered a rebate. The IRS doesn’t view this as taxable income because it means the cost of the item is reduced, so there’s no tax due. For example, if you buy an appliance for $100 and you are offered a $10 rebate, the $10 is not income, it simply makes the product cheaper, which drives sales for the business.
Rewards with no strings attached are liable for tax
There are several situations in which your credit card rewards are taxable.
- Airline rewards: If you earn bonus miles or points for air travel just for opening a credit card, this is not considered a rebate on a purchase and you will be liable to pay taxes on the value of the rewards. However, if these are awarded based on purchases, then taxes do not need to be paid.
- Welcome bonuses: Welcome bonuses are generally not taxable because you would have had to meet a minimum spending requirement to earn them. An example is the Wells Fargo Active Cash Card, which currently earns you $200 cash back if you spend $500 on purchases within the first three months. However, a bonus is taxable if you earn it simply for opening an account or some other reason that doesn’t require a purchase to be made.
- Rewards for referrals: These rewards are earned for getting someone else to sign up for a credit product, and the Internal Revenue Service requires that tax is paid on the value.
Tax expert Scott Hallberg of the Calibre CPA Group explained that a different situation comes up when points or miles that haven’t been issued based on purchases are worth $600 or more. The IRS requires the issuer to report this as income and you should receive a 1099-MISC form. It’s the company’s responsibility to determine the value of the bonus rewards, which should appear in the fine print of the legal disclosures you were sent.
Are business credit card rewards taxable?
The tax liability for business credit cards is similar in that points, miles, or cash back earned based on purchases are considered rebates. Points that are earned without having to spend any money, however, are taxable because they are considered income.
Using rewards to pay for business expenses won’t incur any tax. This is because no actual money changed hands. An example is paying for a $750 flight with accumulated miles; it’s not deductible as a business expense. But if the cost is partly paid in cash and part in rewards, the cash portion becomes deductible.
Should personal expenses and business expenses be kept separate?
Business owners are allowed to use credit rewards for business or personal purposes. Many people choose to use their rewards for personal travel and leisure but deduct the expenses under business. Business and personal expenses should be separated to simplify your tax reporting and to maintain accurate records.
People who want to maximize their benefits elect to pay for business expenses with a credit card to earn rewards to use towards personal spending. These expenses can still be deducted under business expenses.