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 CardRatings.com (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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Kasssy
Kasssy
5 years ago

The government is absolutely desperate for any source of money it can find.
Credit card rebates, social security checks, ROTH account earnings, mortgage interest, on-line purchases, capital gains, social security income limits, medicare tag-on extra taxes for higher income have all been discussed or have already been used for sources for higher income taxes.
Never mind that the federal tax revenue was at an all-time high last year. It needs MORE.*sarcasm*

Beard Better
Beard Better
5 years ago
Reply to  Kasssy

Just looking at the level of tax income is a very poor metric, if your goal is to compare to past years. Average/median tax income per citizen and per corporation would be better, especially if you want to say that the burden of taxes is too great now in comparison to the past. This way you could make a fairer comparison to previous years in which the number of citizens and corporations were different. You are also not taking into account how much is needed to accomplish what Congress wants to accomplish (whether or not their goals are reasonable or… Read more »

Julie
Julie
5 years ago
Reply to  Beard Better

You are forgetting the fact that the government doesn’t spend taxpayer’s money the same way that readers of this website spend money. We should be comparing what the government claims to need to fund their objectives, and what private industry would spend to meet the same objectives and hold government to the same standards. My father is a retired school district superintendent and my best friend is a city manager. Both can tell you horrific stories of how frugality is reprimanded and waste is rewarded/encouraged…at least at the state level in California.

Beard Better
Beard Better
5 years ago
Reply to  Julie

>We should be comparing what the government claims to need to fund their objectives, and what private industry would spend to meet the same objectives and hold government to the same standards. Why do you accept this as prima facie truth? I’m not saying you’re necessarily incorrect, but it is an entirely subjective opinion as to whether or not the government should make financial decisions in the same way as a private company. At the very least, it needs to be recognized that the government must (or, rather, should) take into account the effects of their actions on numerous stakeholders;… Read more »

Britni @LazyGirlFinance
Britni @LazyGirlFinance
5 years ago

I’m a little ashamed to admit that it had never occurred to me that my credit card rewards might be taxable. I just took it for granted that it was gift or that I had earned it, sort of like a coupon. Now, this strikes me as unbelievably naive. Uncle Sam taxes nearly everything, including gifts. While I don’t accumulate five figures in CC rewards annually, I do usually get a couple hundred dollars. It will certainly be disappointing when that small amount gets another bite taken out of it. Hopefully the IRS will continue to drag its feet rather… Read more »

Matt
Matt
5 years ago

Just don’t report it. Simple as that. I don’t feel any obligation to give the government any more than it can take from me, and if I can make everybody’s lives easier and keep a little more of my hard earned money in the process, I’ll do it every time. Tax law is so complicated it’s impossible to do everything right, so just do the bare minimum effort it takes for you to get the biggest refund possible and move on!

Mrs Random
Mrs Random
5 years ago
Reply to  Matt

Most of the time, institutions only report anything over the minimum of $600. If you get a 1099, they will also report it to the IRS. No 1099 means no reporting. So it’s up to your conscience to report or not at that point. 🙂

Jeff
Jeff
5 years ago
Reply to  Mrs Random

Exactly, if I don’t get a 1099 then I’m not reporting it.

nicoleandmaggie
nicoleandmaggie
5 years ago

Thanks for this!

Beth
Beth
5 years ago

God, we just can’t get a break, can we?

JoeM
JoeM
5 years ago

I’ve long ago replaced my debit card with my Chase Rewards card and use it for any transaction that I can. I definitely get a couple hundred in cash back – the only option I ever choose. Definitely not 1099 level, but pretty decent.

However, that was last year with two quarters with 5% cash back. I spent ~$200/month in gas last year. This year gas only has one quarter of cash back. That’s pretty much where the majority of my rewards came from.

Victoria
Victoria
5 years ago
Reply to  JoeM

For Chase rewards, there is a work around for gas in quarter 1 this year. This quarter is grocery stores, so buy fuel gift cards at your grocery store to use towards gas. You’ll end up getting the 5% cash back.

If you have remaining funds from the $1500 max near the of the quarter and have the funding to do so, you can buy cards in advance to use towards groceries/gas in the future.

Wiggles @FirstYouGetTheMoney
Wiggles @FirstYouGetTheMoney
5 years ago

The bright side is the IRS is so underfunded that dropping the hammer on this is not even on their radar. I don’t think anyone has anything to worry about any time soon.

Beard Better
Beard Better
5 years ago

I think the biggest hurdle to implementing taxation of credit card rewards is that, for the vast majority of people, it wouldn’t be worth the IRS’ time to collect the money. It certainly wouldn’t be worth their time to try to chase people down over (let’s say on average) ~$200 a year; they’d end up spending more than that just in enforcement. That isn’t to say it’s impossible, or that I think the enforcement of tax law should depend solely on how profitable it is for the government, but it is something worth considering. Oh, and while Republicans are in… Read more »

Golfing Girl
Golfing Girl
5 years ago

We average close to $600/year in cash back from Amex. Even after reading the article, I am unsure if I need to claim it. Probably not going to, until TurboTax asks me specifically.

Steve | Live Smart Not Hard
Steve | Live Smart Not Hard
5 years ago

Holly I can second and third the tax requirement for the bank accounts. I scored a pretty sweet $400 bonus for opening two chase bank accounts. Just got my tax form last week. But as you said, I knew it and was prepared for it.

David Findlay
David Findlay
5 years ago

Be aware that in other countries the situation may be different. In Australia we have fringe benefit tax which can cover things as broad as frequent flyer points.

Beth
Beth
5 years ago

I confess I’m scratching my head at the Big-Bag-IRS-taking-more-of-my-money type comments. You’re getting something for free. (Well, it’s free to you anyway) Just plan for the taxes.

I don’t see what the big deal is, but my perspective is admittedly skewed. We don’t get big bank bonuses or rewards offers like you guys in the U.S. And don’t complain about taxes around a Canadian 😉

wearsunscreen
wearsunscreen
5 years ago
Reply to  Beth

The Destruction of the Tea in Boston was over a 25% tax. All they had to do at that time was switch to smuggled Dutch tea, but there was a protest point to be made. I don’t mind my tax rate I just paid $30k and am getting $66 back. So no surprises here I pretty much knew where I was going to end the year at, and it was nowhere near 25%. I’m just disappointed by how the revenue is used, there’s a huge ethics chasm between people who can tell right from wrong and the US gov’t, and… Read more »

Vawt
Vawt
5 years ago

It will be tough to determine what the actual value of any earned points was as the cost of a flight varies dramatically in the months leading to the departure. Hopefully we have some time to keep living the high life until the change is made.

Melissa
Melissa
5 years ago

Wow, this is really good to know! So glad all the travel points I just got on my Barclay’s aren’t taxable… yet. I would be bummed if I had to pay taxes on the, like, one free trip I take a year! :-/

BeSmartRich
BeSmartRich
5 years ago

Haha Well. I wouldn’t be very comfortable if they require me to pay taxes on the cash rebate so I would not include it until they challenge it.

BeSmartRich

wearsunscreen
wearsunscreen
5 years ago

I got an offer from chase for $450 to try their savings and checking accounts. In the offer it said the $450 was going to be reported as interest on a 1099int or div (ok I forgot which) at the end of the year.

I also have a boatload of loyalty points. Mostly with Delta and Marriott. It’s my understanding these loyalty awards are like rebates and not taxed.

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