According to experts, whether cash back and points are taxable depends on the type of card you have and the kind of rewards you earn.
The IRS taxable and nontaxable income list does not directly address credit card rewards. However, the experts say the answer is based on the kind of rewards you’re accumulating and the kind of credit card you have.
When are credit card rewards taxable?
You have to spend money to earn regular, ongoing rewards like cash back or travel points. So you’re not really getting “free” money like you would with a cash prize or bonus, which is taxable.
Credit card rewards that are taxable for not requiring an expense in return:
- Welcome bonus
- Referral bonus
- Cash prize
“Credit card rewards for individuals are usually not taxable,” says Susan Allen, senior manager for tax practice and ethics at the American Institute of Certified Public Accountants.
“The logic is that the reward is almost like using a coupon or getting a discount on the purchase,” Allen says, so by getting cash back, “it’s really like reducing the purchase price.” The same logic applies to travel points and miles.
When are credit card rewards not taxable?
Usually, in order to receive a sign-up bonus, you’ll have to spend a certain amount on the card within a specified time frame. In this case, the reward is still more like a rebate than a prize or award, making it nontaxable.
Credit card rewards that are not taxable because they require an expense in return are:
- Welcome bonus in exchange for spending a certain amount of money
- Cash back
- Airline miles
The exception is when you receive a bonus or gift without having to spend any money, like a sum of cash back just for opening an account or a cash bonus for referring a friend.
In these cases, the reward is more like a prize or award, which are both taxable. If the total of the award amount exceeds $600, you will probably receive a Form 1099-MISC from your credit card company, in which case you’ll need to include that amount on your tax return.
It’s a different story if you have a business credit card and you use your rewards, such as cash back or a gift card, to help offset your business expenses. While the rewards themselves aren’t taxable, they can reduce your deductible expenses, increasing your tax burden.
According to Meredith Tucker, a principal at the CPA and advisory firm Kaufman Rossin, the example of a business owner who charges $1,000 on their credit card for business travel and uses the $200 they earned in cash back to reduce their out-of-pocket cost to $800. The most they can deduct from their taxes in that situation is $800.
And if you use only your rewards to cover the price of a purchase, you won’t be able to deduct the cost of the item from your business expenses, Tucker says.
As a business owner, you may prefer to use rewards to cover the cost of an item. That way you “don’t have to pay for something, rather than just get a deduction for it,” she says.
You also need to pay attention if you open up a new credit card and receive a cash bonus for signing up (rather than meeting a minimum spending requirement), or get cash for referring a friend. That extra cash you scored could be considered taxable income.
“Some credit card issuers may report the bonus as income on (IRS) Form-1099,” which reports miscellaneous income, Allen says. “You would need to report that income on your tax return.”
How to avoid taxes on your credit card rewards
The IRS doesn’t consider rewards taxable unless exemptions are applicable, as mentioned above. But if your intention is to always avoid taxable rewards, apply to a credit card that doesn’t give you bonuses and prizes without requiring an expense in return.
Key takeaways from the difference between taxable and nontaxable credit card rewards:
- Most credit card rewards are considered rebates, making them nontaxable.
- Awards and sign-up bonuses that require no spending are taxable.
- Business credit card holders should deduct the value of credit card rewards from their business expenses.