Do You Need to Report Credit Card Rewards on Your Taxes?

When used regularly, rewards credit cards offer some serious value. Some cards have hundreds of dollars in bonuses and rewards rates of up to 5% or 6% on purchases. If you put all your regular bills on your rewards card, it's possible to earn over $500 back per year.

You may be wondering if you'll need to include those rewards in your tax return. After all, Uncle Sam always wants his cut of the money you make. Fortunately, most credit card rewards don't qualify as income.

Rewards you earn on purchases aren't taxable

If you earn credit card rewards by making a purchase, the IRS classifies those rewards as a rebate. Rebates on purchases aren't considered income. This applies to most of the rewards consumers earn, which is why people rarely need to report rewards on their taxes.

For example, if you have a cash back card that earns 2% on purchases, the cash back is considered a rebate on your spending. If you spent $50,000 and earned $1,000, that's technically a $1,000 rebate. It works the same way with travel credit cards that earn points or miles. You don't need to report your points/miles on your taxes, no matter how you use them.

This is also true with most sign-up bonuses. If a card offers a $200 bonus for spending $500 in the first three months, you don't need to pay taxes on that $200. It's a rebate on the $500 you spend. Regardless of the bonus amount, if you need to spend something to earn it, then it's not taxable.

If you receive rewards without a purchase, then they're taxable

The key element that keeps rewards from being taxable is making a purchase. But there are some rewards offers that don't require any spending, and these are considered taxable income. Here are the most common examples:

• Sign-up bonuses without a spending requirement: Most sign-up bonuses require you to reach a spending minimum to earn the bonus rewards. But if you receive the bonus just for opening the card, then it's taxable.
• Credit card referral bonuses: Many card issuers offer bonuses if you refer new cardholders. Once again, since these bonuses aren't tied to spending, they're taxable.

You'll get a 1099-MISC if necessary

If you make $600 or more in credit card rewards with one card issuer during the tax year, you'll receive a 1099-MISC form. It will include the amount to report on your taxes.

Note that if you earned points or miles, your card issuer will set a value for those rewards and use that to report the income. A common valuation is $0.01 per point/mile, but this depends on the card issuer and the type of rewards. So, if you received 75,000 in bonus points from referrals, your card issuer may value those at $750.

This normally makes it easy to report the correct amount of your taxable credit card rewards. Just keep in mind that you likely won't get a 1099-MISC if you received less than $600 in taxable rewards. This doesn't mean you can skip reporting any form of taxable income. The $600 threshold is just when your card issuer is required to send you a 1099-MISC.

As with any tax questions, if you're not sure what to do, the best solution is to talk to a tax professional. They can provide advice specific to your situation. But most people don't end up owing taxes on credit card rewards. If all your rewards have been earned by spending money, then you won't, either.