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One of the most exciting parts about getting a new credit card is the signup bonus. There’s also the excitement of learning about the additional card benefits like travel credits or free hotel nights. With all of the possibilities available, you probably never think to ask, “Are credit card rewards taxable?” I didn’t.
After all, when’s the last time you heard somebody say they needed to include their credit card travel miles on their income tax return? The answer is probably, never.
That doesn’t mean credit cards for travel rewards aren’t taxable. In most cases, you never have to pay taxes on your credit card rewards. But it’s always good to know when you might.
When Are Credit Card Rewards Taxable?
Are credit card rewards taxable?
Credit card rewards are rarely taxable. But if they are, you will receive a Form 1099-MISC by January 31 of the year needed for your tax return.
Credit Card Referral Bonuses
If you’re going to earn taxable credit card rewards, it’s most likely going to come from refer-a-friend bonuses. However, it might depend on how many friends you refer and the total value of your bonuses.
Many credit card companies now cap your annual referral limit at $500 or less. This is because the IRS requires companies to send a Form 1099 when your annual taxable income exceeds $600.
Because you’re not required to make a purchase to refer friends, this bonus type isn’t a rebate.
Other Examples of Taxable Credit Card Bonuses
An example of taxable credit card rewards is any reward you signup for and automatically receive when your application is approved. For example, you would have to pay taxes on the $100 instant bonus you receive just for applying and having your application approved.
This is because the IRS considers these forms of credit card rewards as taxable income.
Before you start thinking that the IRS is going to audit you for the new credit card bonus you received five years ago, don’t fear. Most credit cards require you to make at least one purchase or spend a preset amount of money to receive the bonus.
These types of credit card rewards are rare. This is mostly because current tax law is very lenient on credit card rewards that qualify as “rebates” instead of “income.”
The most relevant example of taxable rewards is when you earn a bonus for opening a new bank account. Some bank promotions offer a cash bonus when you open a new account and make a deposit.
As an example, you can deposit $5,000 and get $500 bonus cash. Because you’re depositing money instead of spending money on new purchases to get a rebate, the $500 bonus is considered taxable income. At the end of the year, the cash bonus and any bank interest you earn will need to be included on your tax return.
The Largest Downside of Taxable Credit Rewards
Taxable credit card rewards are hard to assign a value when they can be redeemed for cash or travel rewards. When your credit card rewards are taxable, the bank has to assign a value for each point. Maybe, they’ll use the benchmark rate of 1 cent per point. But what if they “overvalue” the points at 3 cents per point?
If you redeem your points for award flights, you can usually get the 3 cent valuation or more from each point. But if you redeem them for hotel nights or cash rewards, the average point value is usually 1 cent or less. In these two instances, you’d lose money on top of your tax liability on the amount of the reward.
Examples of Non-Taxable Credit Card Rewards
Now that we know the answer to ‘are credit card rewards taxable’, let’s look at some non-taxable credit card reward examples. The IRS considers most credit card rewards as “rebates” because you need to spend money to earn points. This is good news for you for multiple reasons:
- Rewards points values fluctuate depending on the redemption option
- You only get rewards points if you make a purchase
- Other card benefits are only granted after you pay an annual fee
Below are a few legit examples of tax-free credit card rewards. There’s a 99% chance that these are the type of credit card rewards you have and will continue to receive.
Most rewards credit cards come with a sign-up bonus. However, you only qualify for the bonus if you spend a specified amount within the introductory period. The bonus is only awarded if you meet the spending requirements, so it’s considered a rebate.
These bonuses are usually phrased as follows: “Earn X points after you spend $X within the first three months from account opening.”
Adding Authorized Users
Some credit cards also offer additional bonus points when you add your first authorized user. Make sure to read the terms and conditions so that you meet the conditions to get the bonus.
Redeeming Rewards Points
Each rewards credit card has different redemption options, but the following are non-taxable:
- Cash Back Rewards
- Travel Rewards
- 1:1 Airline and Hotel Point Transfers
- Gift Cards
- Charitable Contributions
Because you only receive the points after you make a purchase, these rewards points are considered rebates.
Travel Statement Credits
Some travel credit cards offer an annual travel statement credit. Once again, these credits are a “rebate” because you have to make a purchase before you receive compensation.
Whether it’s a 25% statement credit after making an in-flight purchase or being reimbursed for a flat-rate travel statement credit like the Chase Sapphire Reserve’s $300 Annual Travel Credit as reimbursement for travel purchases charged to your card each account anniversary year.
Free Hotel Night Certificates
Several co-brand hotel credit cards offer free hotel night certificates after you pay an annual fee or reach a spending target. In either of these instances, you have to spend money first before you receive the reward.
Upgraded Loyalty Program Status
With an airline or hotel travel rewards card, you may also qualify for upgraded membership status. Some of these fringe benefits may include:
- Priority check-in
- Complimentary upgrades
- Point boosts
With an airline credit card, you may also get free checked bags and priority boarding.
Regardless of which benefits you receive, you still have to make a purchase to enjoy these rewards. With some of them, you’re not receiving any financial gain. Priority boarding, for example, isn’t making you wealthier, it only makes the flying experience more enjoyable.
Summary of Are Credit Card Rewards Taxable
Are credit card rewards taxable? Sometimes yes, but more than likely you don’t have to worry about having taxable credit card rewards. In my many years of earning miles, I’ve never had to pay taxes on my earning. If you do have to report rewards as taxable, it will most likely be for refer-a-friend bonuses. Even then, wait for the tax form to arrive in late January to determine if your rewards are taxable.