Are Credit Card Rewards Taxable?

Credit card rewards are great, but do you have to pay taxes on them?

If so, this could reduce their value by 10 – 30% for the average American taxpayer.

Those in high tax brackets for both federal and state purposes could see a reduction in value of upwards of 50%!

Are Credit Card Rewards Taxable?

Whenever the question comes up of whether or not something is taxable, the real question is whether or not that item constitutes income in the eyes of the IRS.

It’s no different with credit card rewards: if they are in fact income, they are taxable as long as they’re not specifically excluded by some section of the tax code; if they are not income, they are not taxable.

Now, the tricky thing is that Congress never quite defined “income.”  It defined “gross income” as “all income from whatever source derived,” but of course one still has to answer the question, “What is income?”

Is Cash Back Taxable?

Now, to set the framework of whether or not credit card rewards are in fact income, we actually have to go back to 1976, which was before credit card rewards programs even existed.

Revenue Ruling 76-96

In that year, the IRS produced Revenue Ruling 76-96 concerning the taxability of rebates.

In the specific case the IRS was considering, an automobile manufacturer provided rebates to qualifying retail customers who purchased or leased a new car.

Well, the IRS held that rebates or discounts on purchases are not income but are rather a mere reduction of the purchase price.

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IRS PLR 201027015: Cash Back

Over 30 years after Revenue Ruling 76-96, the specific issue of cash back credit card benefits was brought before the IRS.

In Private Letter Ruling 201027015, the IRS — referencing Revenue Ruling 76-96 — specifically stated that, similar to rebates, cash back credit card benefits are treated as discounts and not as taxable income.

So while taxpayers don’t have to report their cash back as income, they do have to reduce their tax basis in an asset purchased with a cash back card by the amount of cash back earned on the purchase.

This really doesn’t have ramifications for personal purposes, but as I describe below, it does have ramifications for businesses.

Are Travel Points Taxable?

Throughout the 1990s, there was much turmoil among frequent flyers that the IRS would tax their airline miles.

People who traveled on a weekly or monthly basis, using points for all flights and travel expenses, were afraid that they would have a substantial tax bill for the value of these rewards without having the cash to pay the taxes.

IRS Ann. 2002-18: Travel Rewards

The IRS finally put an end to the questions with Announcement 2002-18, which provides that taxpayers do not have to include frequent flier miles earned from business travel in their taxable income.

Check out my video here,

Are Sign-Up Bonuses Taxable?

So we’ve established that cash back or travel rewards earned from using a credit card aren’t taxable income.

But what about sign-up bonuses?

Well, it turns out that their taxability depends on whether or not there’s a spending requirement to receive the bonus.

Bonuses Tied to Spending

If a sign-up bonus is tied to a certain spending threshold, then the bonus is essentially treated the same as cash back rewards: they are not taxable income but rather reductions in the purchase price of the item.

For example, the Chase Sapphire Preferred currently offers 100,000 bonus points (worth approximately $1,250 in travel rewards when redeemed through Chase) if you spend $4,000 on the card within the first three months of opening your account.

This bonus would not be considered taxable income because it’s contingent on a certain amount of spending on the card.

Bonuses Not Tied to Spending

But what if you receive a reward from your credit card company simply for signing up for the credit card, without ever having to use it?

In this case — which is quite rare, mind you — the signup-bonus would be considered a taxable bonus by the IRS rather than a purchase price discount because there was no purchase in the first place.

In this case, the credit card company may very well issue you a Form 1099 for your earnings.  But even if they don’t, you should still report this income on your tax return.

Wells Fargo Propel

• Basics: The no-annual-fee Wells Fargo Propel gives you three points per dollar spent on eating out, ordering in, gas stations, rideshares, transit, flights, hotels, homestays, car rentals, and certain streaming services.
• Welcome Offer: There is a welcome offer of 20,000 points with $1,000 spend within the first three months from opening the account.
• Bottom Line: If you want a simple, straightforward travel card with no annual fee, the Wells Fargo Propel is worth a look.

Business Credit Cards and Taxes

Business credit cards often offer massive sign-up bonuses and outsize rewards on business spending.

This is because business owners often have significantly more expenses than W-2 employees.

And the treatment of cash back, travel rewards, and sign-up bonuses for business cards is no different from the treatment for personal cards.

However, since you can deduct business purchases, it pays to be strategic when racking up and redeeming rewards using business credit cards.

Business Cards and Cash Back

Remember how we previously established that credit card cash back is considered a purchase discount rather than taxable income?

While that doesn’t have such a large impact for personal purposes, this certainly matters for business purposes since you must deduct any discounts, rebates, or points earned from the purchase price of a good or service in determining the deductible amount for the expense.

So when doing your books, you should be recording the discounted, after-cash back rewards cost for expenses and assets.

Business Cards and Travel Rewards

Another tax impact to consider is when a business uses points for work travel.

Unfortunately, if a business uses points to pay for an airline stay or a hotel stay, the company is not allowed to take the equivalent dollar value as a tax deduction.

However, there’s nothing wrong with using the points you accumulated on your business card for personal travel.

So those travel points you rack up on your business cards?  Use them for personal trips, but pay for your business trips on the card itself.