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HomeBusinessYour Money: Are Credit Card Rewards Considered Taxable Income?

Your Money: Are Credit Card Rewards Considered Taxable Income?

Image by Manuel Alejandro Leon from Pixabay

The Internal Revenue Service (IRS) of the United States does not generally see credit card incentives as taxable income. Credit card incentives are not viewed as income by the IRS, but rather as a rebate or discount. As a result, you are exempt from including credit card incentives in your federal tax return as taxable income.

It’s crucial to understand the distinction since there are a few circumstances in which you’ll have to pay taxes on the miles you’ve accrued. The IRS mandates that the issuer sends you a 1099-Misc form and declare any bonus points or miles you get as income if they are worth $600 or more. The credit card company will decide the value of the additional incentives. The disclosures it sent you should contain this somewhere in the fine print.

All rewards from a taxation perspective fall into two categories. The are rewards that are regarded as discounts on purchases and rewards for providing a service that are considered income.

It’s crucial to keep in mind that tax regulations might change over time, so it’s always a good idea to speak with a tax expert or reference the IRS guidelines for the most accurate information pertaining to your circumstances.

How do you know if you owe taxes on your credit card rewards?

The key factor is understanding how you get your rewards. When you come across credit cards that offer bonuses without requiring a purchase or credit card referrals that pay incentives when you sign-up new cardholders, proceed with caution because that’s when things may get tricky. This is due to the possibility that these “no strings attached” offerings can be taxable.

Even though it’s rare, there are deals that would give you money just for applying for a new credit card. Referrals work similarly. You are legally compelled to include these kinds of exchanges as income if you are given money in return for advising someone to open a new card.

This general rule does have a few deviations, though. The IRS may classify cash back rewards you receive as taxable income if you receive them as a reward for getting a new credit card. Additionally, if you use your credit card for business-related purchases and your company reimburses you for them, the rewards you obtain may be taxed.

The cash value of prizes that were treated as rebates will not be subject to tax.

What about spending requirements to get cash back and mileage rewards?

Due to the spending requirement, if you receive $25 in cash back for spending $500 in the first three months after account opening, for instance, which wouldn’t be regarded as taxable income. This includes airline miles, cash back, and redeemable points. For instance, your miles wouldn’t be taxable income if you used your travel credit card to earn ten miles for every $5 spent on flights. In this situation, you’re safe because you must spend money to make money. Additionally, it is unaffected by how much you receive in incentives.

Beware of “Refer-a-Friend” Incentives

Rewards that are considered income referrals for credit cards might be taxed. The same is true for some credit card recommendations, for example when you refer someone to sign up. It is technically taxable income because you are given a cash reward for referring someone to apply for a new credit card.

Present this information to your CPA or accountant- Form 1099-MISC

Your credit card company may send you a Form 1099-INT mandatory if interest income is $10 or more or a Form 1099-MISC that is required if income is $600 or more- for the amount of any sign-up bonuses that don’t require any purchases to be made or a certain spending requirement to be satisfied within a certain period of time.

You can get a 1099 “miscellaneous income” tax form from the issuing institution if bonuses are considered to be income. When you file your annual taxes, this form—which is used to summarize the amount of income you earned must be filled out.

Are rebates received when buying a car taxable?

Oh yes- It depends on your state. In theory, a rebate doesn’t affect the car’s purchase price, and in certain areas, taxes are deducted from the total sum agreed upon before incentives. The amount after incentives and discounts is subject to sales tax in the roughly 20 states that do tax incentives. This indicates that the state only gets tax revenue from the sale price of the vehicle less than any incentives.

For example, in California, the consumer rebate may be identified as an additional down payment or may be subtracted directly from the cash price of the vehicle. In both cases, the amount of the rebate is fully subject to tax.

While rewards and rebates are usually beneficial it’s a good idea to read the fine print on any reward and incentive program. Be sure to check with your accountant about all your spending practices.

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