Tax Time: Do You Have to Pay Taxes on Credit Card Rewards?

Credit Card Rewards Taxes

One of the questions that comes up around tax time is whether or not you are required to pay taxes on credit card rewards. Do they count as income?

In some cases, it might seem as though you are getting something “extra” from your credit cards when it comes to rewards. In fact, Citi caused quite a stir last year when it sent out 1099-MISC forms to some customers. If your rewards credit card paid out more than $600 in 2012, you might see a 1099 form of your own.

Should You Report Credit Card Rewards as Income?

It’s important to understand what constitutes as “income” in the eyes of the IRS. Even if you don’t receive a 1099-MISC, or other paperwork to indicate income, the IRS still thinks you should report your income. So, the question becomes this: Are your credit card rewards actually considered income?

As always, with our somewhat ambiguous tax code, the answer is: It depends.

The question of whether or not your credit card rewards are income — and reportable to the IRS — depends on whether you are dealing with a rebate or a windfall. If it’s a windfall, you are supposed to report it as income and pay taxes on it. If it’s a rebate, though, you are in the clear. The good news is that most credit card rewards programs qualify as rebates.

Here’s a quick look at the windfall vs. rebate issue as it relates to credit cards:

  • Windfall: This is a bonus that you might receive when you sign up for the account. If you receive $200 cash for signing up for a credit card, then it is considered a windfall. The IRS expects you to report the income — even if you don’t get a 1099-MISC. This also applies to huge points values. In the case of Citi credit cards last year, there was a huge ThankYou points value bonus. The points, when given a cash value, were enough to trigger the 1099-MISC.
  • Rebate: Fortunately for you and your pocketbook, most credit card rewards are considered rebates. Whenever a reward is attached to spending money, it’s considered a rebate. So the cash back you receive for spending with your Discover it card┬áis actually a rebate in the eyes of the IRS. Even better is the fact that huge point bonuses and cash bonuses can also be considered rebates — as long as there is a spending requirement. So, if you have to spend $500 in the first three months to get your $100 cash bonus, it’s a rebate and not a windfall.

For the most part, you are probably ok viewing your credit card rewards as rebates. But you still need to understand the difference. You don’t want to end up in trouble with the IRS. If you do end up with a windfall (of any kind), report it on Line 21 of Form 1040. You can get more information if you are issued a 1099-MISC. However, even if you don’t get that form, you should still report windfall income to the IRS.

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