Are Credit Card Rewards and Cash Back Taxable?

For many of us, tax time brings a number of surprises. Although we expect to pay taxes on our earnings, many consumers are surprised to learn that they also have to pay taxes on things like savings and checking accounts sign-up bonuses.

This causes many consumers who are diligent about catching the most valuable credit card rewards and bonus offers to wonder whether or not they might be surprised by a tax on their credit card rewards.

Quick answer: No, you don't have to pay taxes on credit card bonuses and rewards.

If you are not sure if your rewards are taxable, here’s what you need to know about credit card bonuses and taxes.

Credit Card Rewards Can Be Quite Valuable

It’s no secret that, depending on the credit card, the rewards you get can be worth thousands of dollars per year.

In addition to the cash back you earn from your regular spending with cards that award everything from grocery store purchases to entertainment purchases, credit cards provide value in many other ways.

For example, if you frequently fly with a particular airline, you could earn enough miles to pay for free flights. No matter where you fly to, these tickets can be worth anywhere from hundreds to even thousands of dollars.

When it comes down to whether or not it’s worth paying taxes on thousands of dollars in award flights or cash back each year, many people might decide against pursuing these reward programs and benefits.

At the very least, paying taxes on credit card rewards can decrease the value of the rewards significantly. After you factor in any annual fees, the interest rate, and other fees, the rewards and bonuses may not add up.

Can I Get Taxed On Credit Card Rewards?

The short answer is no. The rewards you earn from your credit cards are not taxable. Because they require you to spend money in order to earn them, the points, miles, and cash back you earn are considered rebates and not actual income.

Not same as bank accounts

So, what’s the deal on those offers where you get an extra $50 or a new toaster for opening a new bank account?

In this case, it depends on how much the gift you receive is worth and the amount of the initial deposit in the account.

If your initial deposit into the new account is less than $5,000 and the gift is worth less than $10 then it is not taxable.

If your deposit is $5,000 or more and the gift you receive is valued at less than $20, it is also not taxable.

On the other hand, however, if your deposit is $100 but your gift, whether it’s $50 cash or a coffee set worth $50, becomes taxable and is reported along with other interest income.

In this particular case, you would receive a Form 1099-INT for the gift and any other interest you earned throughout the year.

The value of the gift is based on how much the bank paid for it.

You could, instead, receive a Form 1099-MISC, if you received the gift for using direct deposit instead of receiving the gift as an incentive for opening the account.

Credit Card Bonuses and Taxes

Fortunately, when it comes to credit card sign-up bonuses and rewards, the tax situation is less complicated.

Whether you earn 50,000 miles for spending $5,000 in purchases or a $200 cash bonus for making a purchase with your card, those bonuses are usually free from taxes and can be considered true bonuses.

According to the IRS, these bonuses are viewed as discounts for your purchases, not additional income.

Warnings in the fine print

However, as sign-up bonuses for credit cards get bigger, some credit card issuers have attached disclosures warning that rewards could be reported as income.

If your bonus reaches a certain dollar amount, you could receive a 1099-MISC form, but the terms would be included in your card agreement.

This could also apply to travel rewards such as miles that you earn from a credit card, but typically only happens when you receive a large bonus and if the credit card doesn’t require you to make a purchase or charge an amount to your card.

If you look at it this way, spending requirements to qualify for sign-up bonuses can actually be good.

In most cases, if you don’t receive a 1099 and the card issuer doesn’t notify you that your rewards will be reported, you generally don’t have to worry about paying taxes on anything you have earned.

Free Services, Complimentary Drinks, And Other Credit Card Perks

In addition to the valuable sign-up bonuses you get with credit cards, many offer extra perks and benefits just for being a cardmember.

For many cardholders, perks like free Wi-Fi, complimentary drinks, lounge club access, car rental insurance waivers, and free checked bags can be worth thousands of dollars by themselves.

The good news is, even perks like complimentary companion tickets are also often considered rebates, simply because you have to actually use the card to gain access.

Although this can be a gray area, for the most part, you won’t have to pay taxes for the extra benefits and free services you get from owning a credit card.

Earn Credit Card Rewards Without Worry

Although you will likely have to pay taxes on the bonuses you get from banks when you open new accounts, credit card bonuses are considered discounts and rebates rather than gifts or income.

Whether you sign-up for a new card to earn extra bonus points, cash back, or miles, you will likely not have to pay taxes on it.

So, if you can easily meet the requirements without spending more money than you normally would, a new cash back or travel rewards credit card can be worth signing up for.

Likewise, most credit card benefits and perks are also tax-free. If you manage your credit cards responsibly, you can take advantage of the opportunities to earn thousands of dollars in benefits and rewards, without it costing you anything extra.