Will You Owe Taxes on Your Credit Card Rewards This Year?

Everyone knows the IRS taxes the income you make from your job and any side hustles you have. But that's far from all you'll owe taxes on. The government also taxes things like savings account interest, forgiven credit card debt, and money obtained from illegal activities. Sorry, criminals. You're still not off the hook.

Once you go down the rabbit hole of what's taxable, you start to question everything, like are credit card rewards taxable? Fortunately, the answer is probably not. But there are a few situations where you might have to split your rewards with Uncle Sam.

How the IRS treats credit card rewards

Most credit card rewards programs work the same. You use the card to make purchases and you earn points or miles. When you've accumulated enough points, you can redeem them for cash back, gift cards, travel rewards, and more.

The IRS sees these types of rewards as rebates, similar to if you purchase an appliance and mail in a form to get a portion of your purchase price back from the manufacturer. It's considered an adjustment to the original purchase price, not a gift that you received. So it's not considered taxable income.

Welcome bonuses are generally not considered taxable income either because there is a spending requirement new customers must meet to obtain the bonus. But if a credit card issuer gives you a bonus simply for opening the card with no other criteria, this would likely be considered taxable income.

The same goes for credit card bonuses you get from referring friends and family to the program. Since there's no spending requirement, it can't be treated as an adjustment to a purchase price, and so the IRS wants a piece of it.

Business owners may be an exception

Business owners also have to be careful about credit card rewards when tracking their deductible business expenses. You’re allowed to write off the cost of goods and services you need to run your business, but if you paid for those items with credit card points, you may only write off the amount after the price adjustment. For example, if the item is $100 originally but you use credit card rewards worth $25, you could only write off the remaining $75 as a deductible business expense for the year. 

What to do if you owe taxes on your credit card rewards

It's rare to owe taxes on your credit card rewards, but if you do, you'll need to report it on your taxes. If the reward was worth $600 or more, the card issuer will mail you a 1099-MISC form outlining how much you received. You won't get one of these forms if the reward was less than $600, but that doesn't mean you can forget about it. You'll just have to keep track of the amount yourself and self-report it.

Your tax-filing software should give you a place to enter information about other sources of income. If you're still not sure how to handle this, a tax professional may be able to assist you.