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How To Know If Your Credit Card Rewards Are Taxable

Tax season is here, and you’re no doubt busy gathering all of your tax-related documents. As you do this, you might also be wondering if your credit card rewards are taxable.

If you use rewards credit cards strategically, you can earn anywhere from several hundred to thousands of dollars in rewards. You’ll be pleased to hear that, in most cases, rewards aren’t taxable, but there are exceptions you should know about.

When Your Credit Card Rewards Are Taxable

Whether credit card rewards are taxable depends on how you earned them. If you received cash or miles, for instance, for simply opening an account, you might have to pay taxes on the amount.

Here’s why: You didn’t have to earn the rewards by spending your own money. So, in effect, it’s considered taxable income by the IRS.

I know it sounds complicated, but there’s a simple way to determine if your rewards are taxable. I’ve broken it down into bite-sized pieces for you.

Credit Card Sign-Up Bonuses

When it comes to sign-up bonuses, things get a little murkier. Depending on how you earned the bonus, the points may or may not be taxable.

Let’s say you opened a credit card that offered a 50,000-point bonus for meeting a spending requirement of $3,000 within the first three months of opening the account. If you met the requirement and earned the bonus, you wouldn’t have to report the points as income because you spent your own money to get the bonus.

Here’s where it can get sticky: If you didn’t have to meet a spending threshold and you were awarded the points for simply opening an account, the value of those points would be considered taxable income by the IRS. From the perspective of the IRS, you didn’t earn the bonus, so it’s considered a gift.

Refer-a-Friend Bonuses

Have you ever gotten an offer from a credit card issuer that wants to reward you for referring a friend? If you do refer a friend and that friend is approved, the amount of your reward is taxable.

Here’s the reasoning: You basically helped a company get a new customer. You received a “payment” or a “commission” for your services. It still might be worth it, depending on the amount. Just be aware that there could be taxes to be paid on the bonus.

Tax Form 1099-MISC

If you receive a reward or bonus that wasn’t earned, there’s a chance it could be reported as miscellaneous income. This is a catch-all for income outside of regular wages, such as rent payments or royalties. The IRS only requires a 1099-MISC to be filed when the income is $600 or more.

But keep in mind that even if you don’t receive a 1099 form, you still have to report all qualifying taxable income. If you’re unsure whether the rewards you earned are taxable, it’s best to consult with a tax professional for guidance.

And what if you receive a 1099-MISC form, but the value of your rewards is incorrect? Contact your issuer and ask how the amount on the form was determined. If it turns out to be an error, ask your issuer to send you a corrected 1099-MISC form.

When Your Credit Card Rewards Are Not Taxable

Fortunately, most of your credit card rewards aren’t taxable. Let’s take a look at each type of reward:

Earning Points With Purchases

Some credit cards offer a points system that you can redeem for gift cards, travel expenses or statement credits. As long as you have to spend money to earn the reward, your points or miles aren’t taxable.

Earning Airline Miles for Free or Discounted Flights

Travel rewards credit cards offer you opportunities to save on travel. If you use your cards strategically, it’s possible to accrue thousands of miles that you can use to subsidize your travel.

Again, the key is whether the miles were a gift or whether you had to spend your own money to earn the miles. If you earned 2 miles per dollar spent on purchases, for example, then you’re in the clear. You’ve basically earned the miles, but the result is a discount on purchases.

Every year, I earn more than $4,000 in credit card rewards. I’ve never had to pay taxes on the amount because I’ve spent my own money to earn the rewards.

Cash back rewards are always popular with consumers. Cash back credit cards are usually easy to use, and you can earn rewards on everyday expenses. Like with other rewards credit cards, if you have to meet spending thresholds to earn the welcome bonus or make purchases to earn rewards, your earnings are viewed as a rebate and not as taxable income. The same goes for miles, points and any other credit card rewards you earn for meeting certain spending requirements.

How to Avoid Taxes on Your Credit Card Rewards

These days, most credit card rewards are rarely taxable because there’s usually a spending requirement to earn a welcome bonus as well as to earn rewards. The IRS views this as a discount, not as income. Stick with offers where you have to use your card to earn rewards or to get a sign-up bonus and you’ll be fine.

But if you have an opportunity to get a reward or bonus without any spending on your part, think carefully before you open the account. Your “free” gift is considered income, so run the numbers and determine your tax liability in these cases.

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