Nowadays, with cash-back rates reaching as high as 6%, credit card rewards can yield a substantial amount of money, particularly when purchasing expensive items. Thats great for you as a consumer—but theres also a lot of ambiguity for you as a taxpayer.
Unfortunately, the Internal Revenue Service (IRS) doesnt say much directly on the treatment of credit card rewards. But in general, any income a taxpayer receives is subject to tax by the government. Whether or not rewards are deemed taxable may primarily depend on the kind of rewards and how you receive them.
In some cases, the rewards may be viewed as a rebate or discount, not as income. For instance, a credit card rewards program is handled as though it were a post-purchase rebate. On the other hand, some credit card reward programs provide sizable sign-up bonuses, which the IRS may ultimately determine to be taxable income.
The situation is slightly different if the purchase is for business purposes, rather than personal ones. If you use a business credit card, you should generally deduct any rewards from the total cost of those purchases, which will reduce the amount you can write off on your taxes.
So its not technically boosting your taxable income, but the net result does increase your tax burden.
In the world of finance, credit card rewards can be a sweet bonus for savvy spenders. But when it comes to taxes, the question arises: do these rewards count as taxable income? The answer, like most things in the tax code, is a bit nuanced.
The IRS Weighs In: Cash Back as Rebates
The IRS hasn’t specifically addressed the tax treatment of credit card rewards because of its infinite wisdom. Although there is some leeway in interpretation, the majority of tax professionals concur that cash-back rewards obtained by using credit cards frequently are effectively rebates. Put more simply, you’re receiving a discount on your purchases rather than “extra” money.
Consider this: if you spend $100 on an item and receive $5 in cash back, you have actually paid $95 for it. The $5 reward is not an additional source of income; rather, it is merely a means to encourage your spending.
When Cash Back Gets Taxed: Sign-Up Bonuses and Cash-Out Programs
When it comes to sign-up bonuses and cash-out programs, things become a little murkier. Sign-up bonuses are considered taxable income because they frequently entail getting paid in full for creating an account or earning points. Since you didn’t really have to pay for this reward, it’s more appropriately considered a windfall.
In a similar vein, cash-out programs that let you exchange your rewards for real money instead of spending it on goods or trips may also result in tax obligations. If the rewards exceed a certain threshold, the IRS may consider them to be unearned income in certain situations.
The $600 Threshold and Form 1099-MISC
Your credit card issuer will send you a 1099-MISC form if you receive cash-back rewards totaling at least $600 in a single year. This form notifies the Internal Revenue Service (IRS) that you have received taxable income. If the income you receive falls into any of the previously mentioned taxable categories, you must report it and pay taxes on it even if you do not receive the form (because your rewards were less than $600).
The Bottom Line: Tread Carefully and Seek Guidance
While credit card rewards generally don’t trigger tax headaches, it’s always wise to err on the side of caution. If you’re unsure about the tax implications of your rewards consult with a tax professional. They can help you navigate the complexities of the tax code and ensure you’re compliant with the IRS.
Remember, it’s better to be safe than sorry when it comes to taxes. You can steer clear of any unpleasant surprises come tax season by being aware of the subtleties surrounding how cash-back rewards are handled and by seeking professional assistance when necessary.
Real-World Example of Cash Rewards and Taxation
In November 2021, a real-world illustration of the potentially complex and taxable nature of credit card rewards surfaced. Due to a campaign that encouraged business owners to use American Express’s fee-based wire service, write off the costs as business expenses, and then treat the cash rewards earned from the transaction on a personal credit card as tax-free, the Wall Street Journal reported that the Justice and Treasury Departments were looking into the company.
Targeting professionals and small business owners who were reluctant to accept American Express credit cards, the 2018–2020 campaign looked like this: An organization would use American Express wire service to pay suppliers, contractors, or even staff members. It could then deduct the cost of using the service—fees of 1. 77% to 3. 5% per transaction—as a business expense on its tax return. Furthermore, AmEx representatives stated that the company owner could accrue reward points for the wire transfers (just like with a credit card purchase), move the points to a personal AmEx Platinum Charles Schwab card, and exchange the points for real money at 1. 25 cents per point.
Its that last part that potentially gets problematic. Generally speaking, unless you truly receive rewards points in the form of cash, as these small business owners were urged to do, the IRS views rewards points from personal purchases as a discount rather than income. The ambiguity created by the involvement of two distinct parties—a corporation made the points-accruing purchase, but an individual later used the reward points to cash out—makes the reward appear more like unearned income than a rebate.
Early in 2020, American Express stopped the practice, hired attorneys to look into it on its own, and then announced that it had “failed to uphold” its standards and took “actions to change products, policies, and personnel.” [its] values and had positioned certain products inappropriately, specifically with respect to tax benefits. A few months later, in April 2022, it was announced that the IRS had begun looking into the situation on its own.
The American Express narrative ought to act as a warning to exercise caution when utilizing card-related benefits and fees for tax purposes. Additionally, it might force the IRS to make adjustments and at last offer more detailed details regarding the taxation of credit card rewards.
Donald P. Gould Gould Asset Management, Claremont, CA.
It depends on how the rewards are received. The majority of rewards are obtained by using the card; for instance, you can accrue reward points by using your card to make purchases. These rewards are considered rebates. However, rewards provided as an incentive for opening an account could be considered taxable income.
Do You Get a 1099 for Credit Card Rewards?
If you receive a 1099-MISC from the credit card company, then you may have to pay taxes. Don’t bury your head in the sand or jump to conclusions. Get advice from a tax expert and take it from there.
Is cashback and store credit taxable??
FAQ
Is cashback a source of income?
Does cash money count as income?
Is cashback taxable income?
Is Chase cash back taxable income?
Do cash-back checks count as income?
If you actually receive a cash-back check directly, though, it gets a little trickier: It probably also would be considered a type of rebate, but it could technically count as income. Broadly, concerns over your credit card rewards getting taxed will typically arise when cash is actually paid to you.
Are cash back rewards taxable?
If you think about it, it’s not as if any of these companies are offering you cash for nothing; more often than not it’s used as incentive for you to purchase something. And since a discount isn’t taxable, there’s no need to keep track of all your cash back rewards to prepare your tax return.
What is a cash-back credit card?
Cash-back credit cards offer a straightforward way to earn cash back on everyday purchases. There are four different categories of cashback cards, including flat-rate, tiered, rotating bonus categories or choose-your-own category. Flat-rate cash-back cards offer the same rewards rate on every eligible purchase.
Is a cash-back reward a good deal?
It varies. If a cash-back reward is credited directly to your credit card account, then the income is generally considered a nice rebate that comes with the benefit of using the card.