My wife and I recently took a trip up to Portland, Maine. We used frequent flyer miles to get us both there and back.
It seems like almost every credit card now offers some type of rewards program. Some give you frequent flyer miles, some provide cash back, and others provide points for purchasing items like gift cards.
Assuming that you do not keep a balance on these cards, these rewards can be a nice little benefit (If you keep a balance, the reward value is obliterated by the interest you pay). But a question that sometimes arises from receiving these rewards is, “Are they taxable?”
It is a great question since everything seems taxable these days.
So here is what you need to know about rewards received from personal credit cards for personal purchases:
- Most rewards are not taxable. The IRS typically views credit card rewards, not as a bonus, but a rebate or discount on your purchases. For example, if your credit card gives you 2% cash back on a $100 credit card purchase, the IRS does not see a $2 gift but a $98 purchase. This is true with frequent flyer miles as well, where they consider the cash value of the miles to be a rebate on the purchases.
- Sign up bonuses may be taxable. Whereas most rewards for purchases are not considered taxable, you may received a Form 1099 for some credit card sign up bonuses. One of the key triggers to these bonuses becoming taxable is the lack of connection to a purchase. So a $50 bonus for simply opening a credit card may be taxable since the cash is not tied to a purchase. However, a sign up incentive that provides $50 cash back after your first $500 worth of purchases may not be considered taxable since it is tied to the purchases, making it a rebate.
So if you have been concerned about whether or not you should pay income taxes on your credit card rewards from personal purchases, relax. You probably are not required to pay anything. Of course, I always recommend contacting a trusted tax professional just to be safe.
And I could not end a post that deals with credit cards without encouraging you to exercise caution when using them. Credit card debt can wreak havoc on your finances and your ability to be generous. Debt is a generosity killer. If you have a history of credit card debt, you are simply better off not using them. Use a debit card instead. No reward program is worth getting back into debt.