Credit card rewards are not taxable in most cases. The IRS views credit card rewards the same way they view discounts, and discounts aren’t taxable. Rewards credit cards give points, cash back, or miles on purchases, which you can then redeem for statement credits, gift cards, merchandise, and travel expenses. Because of that, it’s like you’re getting a small discount every time you make a purchase.
There are some situations in which credit card rewards may be considered taxable income. Many credit cards offer a signup bonus for new cardholders that is rewarded once they meet a minimum spending requirement. For example, you might get $150 for spending $500 within the first three months. If you receive a signup bonus for meeting a spending requirement, that bonus is not taxable. However, if you receive a bonus without meeting any spending requirement, then it is considered taxable income. To make it simple, if you’ve done nothing in exchange for the rewards, they’re considered taxable.
Currently, though, there aren’t any credit cards offering bonuses for nothing in return – at least any you have to worry about tax-wise. Even credit cards that don’t have a high minimum spending requirement usually require that you make a purchase before receiving the bonus. Others just give you a gift card, which isn’t considered taxable income, either.
When it comes to anniversary and referral bonuses, lines aren’t as clearly drawn. Some anniversary bonuses require that you spend a certain amount each year to receive the bonus, or renew the card by paying the annual fee. In these cases, an anniversary bonus clearly falls into the “not taxable” category. Referral bonuses, on the other hand, likely will be considered taxable income. American Express and Chase even send out a Form 1099-MISC to file with the IRS after cardholders earn referral bonuses.
Business credit card rewards differ slightly in terms of whether they’re taxable or not. While the actual rewards you get from your business credit card aren’t taxable, the IRS will expect you to subtract them from the business expenses you report. You’ll have to consider the rewards as discounts on your business expenses, which will reduce the amount you’re able to deduct on your taxes.
To sum things up, the only times you have to be concerned about credit card rewards and taxes are if you have a business credit card or you receive a bonus without doing anything to get it. Other than that, you can enjoy the rewards you earn without a second thought.
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