Credit card rewards can help you save money on everything from a dream vacation to your weekly grocery run. Whether you have a travel credit card earning airline miles or a cash-back credit card for daily essentials, those rewards can make a big difference in your budget over time.
Luckily, most credit card rewards don’t count as taxable income, and the rewards you earn shouldn’t be a major factor in filing your tax return. Here’s what to know about credit card rewards before you file.
In general, credit card rewards count as rebates or discounts rather than taxable income. Think about the process of how you earn rewards:
If you spend $200 on a purchase using a card that earns 3% cash back, you’ll get $6 of your purchase returned. On a card that earns points, let’s say you earn 3x on your $200 purchase for a total of 600 points. You have to spend money to earn your rewards with either card.
Similarly, most cards require you to spend money to earn a new cardholder welcome bonus. If you open a credit card with a 60,000-point sign-up bonus, for example, you may need to spend $4,000 within the first three months to earn it.
For these common rewards structures and sign-up bonuses, the rewards you earn are like a rebate on the purchases you make with the card.
The Internal Revenue Service (IRS) doesn’t specifically name credit card rewards in its taxable and non-taxable income guidance. But the agency has previously published some information that indicates it considers rewards as rebates, which you won’t need to claim at tax season.
A 2010 IRS statement details that when a taxpayer uses a credit card to make a purchase that’s eligible for a rebate (in the form of cash back or a charitable donation), the rebate “constitutes an adjustment to the purchase price of the items purchased with the taxpayer’s credit cards and, consequently, is not includible in gross income.”
The IRS ruling is a private letter ruling — it’s not official precedent to use for a future case, and the ruling could always change. But it offers some insight into the agency’s take on a subject, said Daniel Kenny, CPA, CFP, and founder of FI-nancial Planner.
“They said in that case that credit card rewards are considered a rebate or reduction in the cost that you paid … If you get a 2% reward and you bought a $100 gadget, the 2% reward is a reduction in your cost — so your cost is now $98. So in an individual’s case, that means it’s not taxable income,” Kenny added.
While not explicitly mentioned in the IRS ruling, Kenny said we can expect other credit card rewards — airline miles, hotel points, points from a credit card issuer’s rewards program, etc. — to be treated similarly, as rebates.
Your tax liability can differ if you don’t need to spend anything to earn a bonus or reward.
When you aren’t spending money to earn a bonus, the money you get back is no longer a rebate. Instead, it may be considered a form of income.
That means credit card rewards can become taxable when you get a cash bonus for opening an account, but you don’t have to spend any money. Here are some examples:
These credit card offers are not as common from major issuers today, but you can still find some cards with instant bonuses upon approval. Instead of meeting a minimum spending requirement within the first several months, you’ll be eligible for the bonus as soon as you’re approved for the card.
Because this type of bonus doesn’t require you to spend any money, there’s no rebate involved with your purchases or a return that can be applied.
“That can become taxable, because it’s not a rebate, right?” said Heather Townsend, CFP, CPA, owner, and financial planner at Townsend Financial. “It’s like they’re just giving you money. Whereas cash back — it’s a rebate.”
As a result, this type of bonus may qualify as taxable income when it’s time to file your return.
Welcome bonuses with no required spending work similarly to bank account bonuses you can get when you open a new checking or savings account.
Read more about how bank account bonuses are taxed.
Many credit card companies have referral programs that offer a certain amount of cash back or points when you refer a friend. Often, you’ll send your friend a unique sign-up link from your account. Once they use it to apply for a card and get approved, they’ll be eligible to earn a sign-up bonus, and you’ll get a referral bonus — something like $100 or 20,000 points per referral, up to an annual maximum.
“If you referred your friend and they signed up for a card and you got 25,000 points … then you didn’t have to spend any money to get that,” Kenny said. “So that would be taxable.”
In some cases, your credit card issuer may send you a 1099-MISC form with an overview of the taxable rewards you’ve earned over the year. Credit card issuers have different reporting processes, so some issuers may only send the form if you earn the equivalent of $600 or more in rewards. Check your credit card agreement for details on the tax forms you might receive.
Even if you don’t get a tax form in the mail, you may still need to report the earnings on your tax return. Keep track of any taxable rewards you receive so you can accurately report them.
And don’t forget: Like with any tax subject, the best way to ensure you’re filing your credit card rewards correctly is to speak with a tax professional about your specific situation — especially if you’re unsure whether you’ll owe taxes on your rewards. An expert like an enrolled agent (EA) or certified public accountant (CPA) can offer you personalized advice and help you file.
Read more: Can you pay taxes with a credit card?
If you’re looking for more ways to get the best value on your spending, consider using these top rewards credit cards to maximize your cash-back, points, and miles rewards.
Why we like this card: The Chase Sapphire Preferred is a great travel rewards card if you’re looking for both a solid upfront welcome bonus and the opportunity to earn plenty of rewards points over time. Rewards span a number of travel and everyday categories: 5x points on travel through Chase Travel℠; 3x points on dining, select streaming services, and online groceries; 2x points on other travel purchases; and 1x points on everything else.
You can transfer points to travel partners or book travel through Chase Travel and get up to 1.5x value with Points Boost. Other ongoing benefits include up to $50 in statement credits every anniversary year for hotel stays booked through Chase Travel and a 10% points bonus each account anniversary for the points you earned over the prior year.
Read our full Chase Sapphire Preferred Card review
Why we like this card: The Capital One Venture Rewards card can be a great choice for maximizing rewards without the need to strategize categories or purchases. You’ll earn a flat 2x miles on every purchase (plus 5x on hotels, vacation rentals, and rental cars through Capital One Travel), which you can use toward travel purchases charged to your card or to book an upcoming trip using Capital One Travel.
You’ll also get a credit for Global Entry or TSA PreCheck fees, a $50 experience credit when you book eligible hotel stays through the Lifestyle Collection and can transfer your miles to Capital One’s 15+ transfer partners.
Read our full Capital One Venture Rewards Credit Card review
Why we like this card: If you’re looking for cash-back rewards instead of travel, the Blue Cash Preferred Card from Amex is one of the most rewarding options available today. You can earn a solid cash welcome bonus while also taking advantage of a 0% introductory APR offer for new purchases and balance transfers.
Long-term, earn solid rewards across everyday categories, including 6% cash back at U.S. supermarkets (up to the first $6,000 spent each year, then 1%), 6% back on select U.S. streaming subscriptions, 3% back on transit and at U.S. gas stations, and 1% back on everything else.
Read our full review of the Blue Cash Preferred Card from Amex
This article was edited by Rebecca McCracken
Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. All opinions belong solely to Yahoo Finance and are not those of any other entity. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn’t include all currently available offers. Credit score alone does not guarantee or imply approval for any financial product.
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