Benjamin Franklin once said, “In this world, nothing is certain except death and taxes.'' His words have withstood the test of time — and they are now applicable to our credit card rewards.
We all love the idea of traveling for nearly free using credit card points and miles. It allows us to save thousands of dollars on travel costs. However, these rewards could be taxable. And that means you could end up needing to pay Uncle Sam on your beloved credit card rewards.
In this article, you will learn if your credit card rewards or referral bonuses are taxable, what the implications of these taxes are, and the things to keep in mind if you are sent a tax form from your credit card issuer.
Are credit card rewards taxable?
For the most part, credit card rewards are not taxable. In 2010, the IRS issued a clear statement about how credit card rewards are to be considered when it comes to taxes. In the IRS memorandum it says, “A rebate received from the party to whom the buyer directly or indirectly paid the purchase price for an item is an adjustment to the purchase price paid for the item. It is not an accession to wealth and is not includible in the buyer’s gross income.”
In short, credit card rewards earned on purchases are a price adjustment — not income. And since the rewards are not considered income, they are not taxable. This holds true for both cash back or points and miles that you earn on your spending.
However, there are still some cases where you could receive a Form 1099-MISC from credit card companies. This is the form a company uses to report miscellaneous income. And whether or not a credit card company categorizes your credit card rewards as income has less to do with the type of reward you receive and more to do with the manner in which you earn the reward.
We will walk you through everything you need to know about credit card rewards, and how they can affect your future tax filings.
Are sign-up and welcome bonuses taxable?
A sign-up or welcome bonus is something you earn after spending a specified amount of money in a set timeframe. For example, the Chase Sapphire Preferred Card sign-up bonus is 60,000 points after you spend $4,000 in the first 3 months of card membership. Because there is a requirement to earn the 60,000 points (i.e. you have to spend a certain amount), this is not considered “income.” Therefore, it is not taxable.
Bonuses that are given with no criteria to meet are considered income though, says Kedra Flowers, CPA PC. “Credit card sign up bonuses that are in no way stipulated by spending are taxable income to the recipient. Many times when there are bonuses, however, credit card companies require some level of spending within the first 30-90 days in order to qualify.”
You’ve probably seen banks offering cash bonuses for simply signing up for a new bank account. In that situation, the bonus is likely to be taxable as it is given without any minimum spending requirements to be met. However, credit card issuers typically require you to meet certain spending criteria before paying a bonus, so you’re not likely to encounter this scenario with credit cards.
Are credit card referral bonuses taxable?
While credit card rewards aren’t typically taxable, referral bonuses can be. Referral bonuses are available from many credit card issuers. They are intended to incentivize you to refer friends and family to open an account with that same credit card issuer. These bonuses are typically awarded in the form of travel rewards points or additional cash back. This is considered taxable because this money will be categorized as gross income, as opposed to a “rebate” on a purchase.
“Rewards or bonuses that are generated simply by … referring a friend and such will create gross income,” Flowers says. “In this case, there may also be a requirement that the paying company issue a 1099-MISC form to you with a copy submitted to the IRS.” So before you file your taxes each year, make sure you keep an eye out for this 1099 if you’ve referred friends and family. You will need to include this money in your gross income when you file.
Even if the bank doesn’t send you a 1099-MISC form, you should be careful and properly claim your income. As an example, the Hilton Honors American Express Business Card has the following clause in the terms and conditions for the referral program. It states, “The value of the Referral Bonus may be taxable income to you. You are responsible for any federal or state taxes resulting from the Referral Bonus. Please consult your tax advisor if you have questions about the tax treatment of a Referral Bonus.”
Are business credit card rewards taxable?
The rules above apply to personal credit cards, but what about business credit cards? A business credit card is intended for business purchases. These purchases can potentially be written off on a future tax filing. However, the rewards you earn could prevent you from writing off the full expense.
“If … the reward arises from charges you’re deducting through your business, then the reward should be used to reduce the expense,” says Brett Scholl, CPA, of Scholl & Company, LLP.
For example, let's say you purchased a brand-new Apple MacBook Pro for your business for $2,000. If you use a cashback card like the Chase Ink Business Cash, you will need to deduct the cash back earned from the purchase from the amount you paid for the computer. Then, you’ll have the amount that you can claim as a business expense. So if you purchased that computer at an office supply store using the Chase Ink Business Cash, you would earn 5% cash back on your purchase. Your total cash back would be $100 ($2,000 x 5% = $100). The amount of the computer you can claim as a business expense would then be $1,900 ($2,000 - $100 in cash back = $1,900).
In short, the credit card rewards earned from any given purchase need to be taken into account when you are itemizing your business deductions.
Also, be wary of using your rewards for business travel. If you redeem your points for business travel, the retail cost of the travel cannot be claimed as a tax deduction since you did not technically pay for the travel. In the eyes of the IRS, you used your “credit card rebates” to pay for the travel.
Do you get a 1099 for credit card rewards?
Unfortunately, there isn’t a definite yes or no answer. There are reports online of people receiving 1099 forms for their rewards from various card issuers in the past. But just because you receive rewards doesn’t guarantee you will receive a 1099.
If you do receive a tax form, it will typically be the 1099-MISC. This form is issued for any miscellaneous income over $600. Credit card rewards such as referral bonuses can fall into the miscellaneous income category. For example, Chase sent out 1099 forms in August 2019 for referral bonuses given out in the 2018 tax year. While Chase was extremely late in issuing these forms, it further points to the fact that you are responsible for being aware of what is income and reporting it properly.
With all of this information, it’s ultimately up to you to report income that is taxable regardless if you receive a 1099 or not — which is true of all income, credit card rewards or otherwise. And if you are still unsure, it wouldn’t hurt to talk with a tax professional.
How much tax will I have to pay on my credit card rewards?
If you received a credit card sign-up bonus without having to do anything in exchange or you received a bonus for a referral, you will likely have to include it in your tax filing as income. Just how much you will have to pay will depend on your income tax bracket and personal situation.
The 1099-MISC form is generally how income from credit cards will be reported. If you are self-employed, the amount should be taxed at your specific tax rate, but you will also have to pay self-employment tax on your earnings, which includes Social Security and Medicare. If you are not self-employed, your miscellaneous income should be reported as additional income and will be taxed at your specific tax bracket.
Bottom line on credit card rewards and taxes
Now you know your tax liability and how that relates to credit card rewards and bonuses. While this information may not apply to you this year, this knowledge can come in handy if you receive points, miles, or cash from your credit card issuer in the future.
Just remember a few key things when it comes to credit card rewards and taxes:
- When in doubt, talk to a tax professional.
- Don’t let taxes scare you off from earning credit card rewards — if you believe it will be taxed as income based on the information we discussed, you may want to incorporate that knowledge into your future tax planning so you aren’t caught off guard.
- Be strategic with your business credit card. It could be more advantageous to use a personal card for a purchase, or vice versa.