Do credit card rewards count as taxable income?

Over the past 12 months, I have used credit card rewards to finance the bulk of our trips to Jamaica, Las Vegas, Denver, New Orleans, London, Paris, and St. Maarten. And in the process, I've also cashed in a five-figure sum of hotel loyalty points, airline miles and rewards. Of course, I blame part of this on my love of family travel, but it also has to do with how I make a living. Since I'm a points-and-miles blogger for Frugal Travel Guy, it would be pretty weird if I never went anywhere.

Aside from the questions I hear about earning points and miles and booking award travel, I get a lot of questions on the financial aspects of these trips. Are credit card rewards counted as taxable income? How about bank bonuses? If the fine print isn't all that specific, how can I tell?

Are Bank Bonuses Taxable?

We've all gotten at least one of these offers in the mail. They say something like, “Open a new savings account with XY Bank and receive a $300 bonus after setting up direct deposit” or “Earn a $250 bonus after making 10 qualifying transactions with your bank debit card.”

Without a doubt, bank bonuses are counted as taxable income that you must claim. In fact, the bank you earn a bonus from is expected to send you out a Form 1099 for the bonus amount. Is it a pain? Yes, but at least you know up front that you will be taxed on any bonus dollars you earn in a regular or business checking account or savings account. And those dollars are still free money, right?

Are Credit Card Rewards Taxable?

Meanwhile, credit card rewards are an entirely different animal and, thus, different rules come into play. Part of the reason credit card rewards are viewed differently by the IRS is because they are generally doled out in the form of travel currency. And just because you “earn” hotel loyalty points or airline miles doesn't mean you will use them either. And why should you pay taxes on a reward that you may or may not use, or might even use next year?

Another reason: The IRS tends to view credit card rewards as a rebate or discount, not as a bonus. For example, some rewards offers will award you 50,000 airline miles after you spend $3,000 on your rewards card within 90 days, and others dole out 2 percent cash back on all of your everyday purchases. But you have to spend your own money to earn the rewards, which apparently puts credit card rewards in a different category in the eyes of the IRS.

Word until now has been fairly cryptic, but these statements from an IRS news release may shed some light on the subject:

“Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.”

If you just breathed a sigh of relief, hold up. The IRS continues below:

“This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.”

This statement may lead you to believe that credit card rewards, or at least those converted to cash, are in fact taxable. However, it was made over 10 years ago, and not much has been said about the issue since. And in the meantime, bank bonuses and credit card rewards have received entirely different treatment from banks and individuals.

Figuring Out What You Owe

At this point, it is pretty safe to say that you will definitely owe taxes on any bank sign-up bonus you receive. However, the same cannot be said about points, miles, and cash back you have earned on your rewards credit cards. For the time being, it appears that you can cash in your rewards and avoid paying the tax man. If you earned any in 2014 and are worried about whether or not to claim them, Maryalene LaPonsie's article at (Are your credit card rewards points taxable?, March 31, 2014) included this quote:

“The IRS considers rewards to be a discount on the purchase,” says Mark Jaeger, individual tax manager and developer at TaxACT. “For instance, if a cardholder receives 1 percent cash back per purchase, the 1 percent is not taxable because it is a discount on the purchase. If that same person opens a checking account and the bank rewards them with $50, the $50 is considered taxable because nothing was purchased and it is considered an award.”

Will Credit Card Rewards be Taxable in the Future?

If you are worried about paying taxes on your points and miles in the future, you probably should be. Although no official word has been released from the IRS at this point, some banks and card issuers have changed the wording on rewards offers in the last few years to anticipate any changes that may arise. For example, Bank of America began issuing this statement on some of their credit card applications back in 2013:

“The value of this reward may constitute taxable income to you. You may be issued an Internal Revenue Service Form 1099 (or other appropriate form) to you that reflects the value of such reward. Please consult your tax advisor, as neither Bank of America, its affiliates, nor their employees provide tax advice.”

Meanwhile, any credit card rewards that are worth more than $600 may constitute taxable income. According to the IRS, if you earn more than $600, banks are required to send a 1099 tax notice to both the IRS and the recipient.

So for now, it looks like your rewards are safe as long as they don't come in the form of a bank bonus and as long as each individual reward is valued at less than $600. But since that could very well change at any time, it is always wise to consult your tax professional before finalizing your returns.

In the meantime, you can find me enjoying my tax-free rewards and traveling as much as I can before the hammer drops — because we all know it will. It's just a matter of when.

Do you pursue points and miles? Have you claimed any of these rewards on your taxes in the past?

More about...Credit, Taxes

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