Are credit card rewards taxable?

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Credit Cards Can Be A Profitable Way To Earn air miles Where cash back – but do these benefits count as income that you have to report to the IRS and pay taxes? In most cases, the answer is no. But there are exceptions.

“Credit card reward points and cash back are generally considered a promotional benefit or discount and are not taxable,” says David Shipper, senior research analyst for the Aite-Novarica group, specializing in issuance of debit, credit and prepaid cards. “However, there are situations where the rewards strength be considered taxable income.

As always, your specific situation may vary, and it is always a good idea to ask a professional (or professional) about your particular tax exposure. tax software). That said, read on to find out when rewards and miles can be considered taxable income.

Most credit card rewards are tax free

Typically, credit card rewards earned by spending money are not counted in taxable income. If you collect $ 200 in cash back for spending $ 1,500 in three months, for example, it wouldn’t be considered taxable – because of the expense requirement. This goes for airline miles, cash back, and redeemable points, the three most important categories of credit card rewards. And it doesn’t matter how much you earn in rewards either.

In 2013 and 2014, physicist Konstantin Anikeev and his wife won over $ 310,000 in credit card rewards using an American Express card. Due to IRS policy that credit card rewards are not taxable, the couple ultimately did not have to pay tax on their income after a lawsuit resulted in an earlier split decision. This year.

“In general, the US government considers all income taxable, but there is no defined law that says what qualifies as income when it comes to credit card rewards,” Jim Pendergast said, senior vice president and general manager of the altLINE division of The Southern Bank. Society. “Many rewards are considered discounts instead of income, making them tax-free.”

However, the rules change when they relate to rewards given without obligation to spend or other action on your part.

When the rewards are taxable

If you earn rewards with your credit card for free with no strings attached – no spending requirements – they can be considered taxable. For example, if you sign up for a new credit card with a no-obligation amount of $ 500 welcome bonus – where you get $ 500 just for opening the account – this money can technically be taxable.

The same goes for a referral bonus. If you receive a monetary bonus for recruiting someone who opens a card, you would technically be required to report it as income on your income taxes.

However, the Shipper also notes that there is a gray area. “If you are redeeming business card rewards for personal vacations, the rewards may be considered income and could be taxable. Or if you try to “beat the system” and buy money orders or gift cards which are then used directly or indirectly to pay off the credit card, your rewards earnings may be taxable, “he says.

Do card issuers send 1099s for taxable rewards?

If you earn credit card rewards or taxable cash back rewards, you may need to complete a Form 1099 with your tax return for the year in which you earned the rewards. A 1099 is an official IRS form that proves that a business has paid a non-employee. In this case, your credit card company would be the business and you would be the non-employee.

In the event that you earn $ 600 or more in taxable rewards, you may receive a 1099 from your credit card company. If you earn less, you will still need to report this information on your tax return, but you will not receive 1099. Instead, you should review your statements from the previous year to calculate the number of taxable awards (references or bonuses earned without condition of expenditure) that you have earned.

Both Pendergast and Shipper expect the IRS to increase their scrutiny of credit card rewards in the future, so it’s a good idea to check your status beforehand. declare your taxes.

How do I know if I owe tax on credit card rewards?

Unless you collect a significant number of referrals, you probably won’t. Again, you shouldn’t have to pay taxes on any rewards offered – whether in the form of points, airline miles, or cash back – as long as they come with spending requirements. Even if you earn six-figure rewards.

Credit cards that promise no-purchase bonuses and credit card referrals that pay you for signing up new cardholders will require you to pay taxes. These offers are less common, but they do exist – be sure to keep track of all taxable rewards, so you are ready when income taxes roll in.

When tax time arrives and you still aren’t sure if you owe taxes on your rewards, you may be able to find answers to your questions by using a tax software. But it’s even better to seek the advice of an accountant or other tax expert.

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