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As a bonus credit card holder, you may be wondering if any cashback, miles or points you have earned in the past year count as taxable income.
The IRS list of taxable and non-taxable income does not directly address credit card rewards. However, experts say the answer depends on the type of reward you’re accumulating and the type of credit card you have.
When are credit card rewards taxable?
You must spend money to earn regular, ongoing rewards such as cashback or travel points. So you don’t actually get “free” money like you would with a taxable cash prize or bonus.
Credit card rewards that are taxed for not spending in return:
- Welcome Bonus
- Referral bonus
- Money prize
“Personal credit card rewards are generally tax deductible,” says Susan Allen, senior manager of 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 a purchase,” says Allen, so getting cash “is actually like lowering the purchase price.” The same logic applies to travel points and miles.
When are credit card rewards tax deductible?
Usually, in order to receive a signup bonus, you need to spend a certain amount on the card within a certain period of time. In this case, the reward is still more like a discount than a prize or reward, making it tax-free.
Credit card rewards that are tax deductible because they require costs in return:
- 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 spending money, such as a cashback amount just for opening an account or a cash bonus for referring a friend.
In these cases, the reward is more like a prize or reward that is taxed. If the total reward is more than $600, you will likely receive a Form 1099-MISC from your credit card company, in which case you will need to include that amount on your tax return.
Another thing is if you have a business credit card and you use your rewards like cashback or gift card to offset your business expenses. While rewards are not taxable in and of themselves, they can reduce your deductible expenses, increasing your tax burden.
According to Meredith Tucker, director of CPA and consulting firm Kaufman Rossin, an example of a business owner who takes $1,000 from their credit card for business travel and uses the $200 they earned in cash to reduce their out-of-pocket expenses. up to 800 dollars. The maximum they can deduct from their taxes in this situation is $800.
And if you’re only using your rewards to cover the purchase price, you can’t 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, just get a deduction for it,” she says.
Along with keeping track of your business expenses, business owners should track how they use business credit card rewards to offset their business expenses when it comes time to pay taxes.
You should also pay attention if you open a new credit card and get a cash bonus for signing up (instead of meeting minimum spending requirements) or get paid for referring a friend. This extra cash you win may be considered taxable income.
“Some credit card issuers may report the bonus as income on Form (IRS) 1099,” which reports various incomes, Allen says. “You need to report this income on your tax return.”
How to Avoid Taxes on Credit Card Rewards
The IRS does not treat the rewards as taxable unless exceptions apply as mentioned above. But if you’re determined to always avoid taxable rewards, apply for a credit card that doesn’t give you bonuses and prizes without requiring a cost in return.
Key takeaways from the difference between taxable and non-taxable credit card rewards:
- Most credit card rewards are considered discounts, making them tax-free.
- No-cost enrollment rewards and bonuses are tax deductible.
- Business credit card holders must deduct the cost of credit card fees from their business expenses.