Credit card rewards are the points and perks that you get for using a given credit card. They can include benefits like airline miles, redeemable points, concierge services, and free accounts with third party services. (For example, the airport lounge service Priority Pass is a popular benefit attached to many travel cards.)
These rewards can sometimes offer substantial value. For people who spend heavily on a good card, the points can add up to thousands of dollars’ worth of benefits per year. This is well above the IRS’ de minimis threshold for taxable income, raising the question… are credit card rewards taxable?
The good news is no, they usually aren’t. Usually.
When Rewards Are Not Taxable
As a general rule, the IRS does not tax credit card rewards because it does not consider these rewards income. Instead, it considers them either purchased services or a discount on your bill; essentially, marketing.
The IRS charges income taxes when a taxpayer triggers what’s known as a “taxable event.” Generally speaking this is some event which causes you to gain more wealth than you had before. So, for example, getting paid by your employer triggers a taxable event, as would being given a new car or winning the lottery.
However, the agency generally does not consider transactions taxable events for the purposes of gaining wealth and income. If you buy a car for less than it’s worth, for example, you won’t owe the difference to the IRS even though arguably your net wealth has increased. The same goes for accrual of value by assets that you already hold. If your stock portfolio or the value of your home goes up, you don’t owe taxes on that difference until you actually sell the asset.
This outlook informs how the IRS approaches credit card rewards. These are benefits that a taxpayer gains as part of a transaction (using the card, and paying its interest and fees).
Any in-kind perks and services are simply part of what you’ve paid for as a member of this card. Meanwhile points, miles, cash-back bonuses and other similar programs aren’t considered enrichment. The IRS considers them non-taxable rebates off the your bill. According to a 2010 letter issued by the IRS:
Taxpayers will make purchases with the credit cards and, as a result of those purchases, will be entitled to receive rebates. The rebates are based on a percentage of Taxpayers’ credit card purchases (usually 1%) and reduced by fees charged by Company (e.g., administrative and marketing). The percentage of Taxpayers’ credit card purchases, less fees, equals the amount of the rebate to which Taxpayers are entitled ($X) … A rebate received by a buyer from the party to whom the buyer directly or indirectly paid the purchase price for an item is an adjustment in purchase price, not an accession to wealth, and is not includible in the buyer’s gross income.
This holds true regardless of how the rebate is processed. Some cards apply their rewards directly to your account, allowing you to pay for specific purchases with points, crediting you for a given percent of cash-back, or otherwise reducing your bill. Regardless of your specific card’s program, this is considered a direct rebate.
The same goes for cards that issue cash back directly (that is, they literally send you money). The IRS considers these programs a more complex form of rebate. You have still paid the credit card company to participate in this program, and they have offered you the cash back rewards as an incentive for shopping with them. The fact that they gave you cash directly instead of reducing your bill amounts to a more complicated version of the same thing.
When Rewards Are Taxable
The most likely situation under which credit card rewards might be taxable is when a card issues you a direct-cash payment unrelated to any credit card activity. Enrollment bonuses are the most likely example of this. To trigger a possible taxable event, this payment must meet a few qualifications:
- It must be in cash, paid directly to you. Most cards structure their enrollment bonuses as points, miles or cash back, none of which qualify as income.
- It must be a lump-sum payment that is not based on how you use the card. For example, if a card gives a bonus for every amount of money you spend on it, this would be another example of a rebate.
- It must be larger than the minimum amount of taxable income for a 1099 form. On 2019 taxes (filed in 2020) this is $600. If your card paid you less than this, you do not have to report it.
What Should You Do?
At all times, if you have questions about your tax liabilities you should seek out a professional.
As a general rule, you will not owe taxes on credit card rewards. However if you have some reason to think that your situation is different (for example if your credit card company actually sent you a 1099 form or if you received a large, cash payment from them), then speak to an accountant.
When it comes to taxes, it’s always better to be safe than sorry.