Navigating the changing U.S. tax laws can prove challenging. Adding to the confusion: whether cash-back rewards on credit cards are taxable. So, are they? Generally, no, credit-card rewards aren’t taxable — but there are exceptions depending on the type of reward and the Internal Revenue Service (IRS).

Everybody wants to save money on taxes — and that applies to credit cards, including the rewards earned from using them, be they travel miles or cash-back and sign-up bonuses. Depending on the situation, you may need to factor credit-card rewards into your accounting for tax purposes.

Which Credit-Card Rewards Are Taxable?

The only rewards that must be reported to the IRS are those that are considered taxable income. Taxable credit-card rewards include any bonuses or gifts received for signing up for a card, including bonus travel rewards (especially if they can be reported as a monetary amount).

If you’re not sure whether your credit-card rewards are taxable, it’s best to review your card’s terms and conditions. If the paperwork doesn’t state whether you need to report your rewards to the IRS and you don’t receive a 1099 form from the credit-card company, you probably won’t have to worry about mentioning your credit-card rewards when you file taxes.

You Might Be Sent a 1099 Form

Generally, credit-card issuers are required to report awards and prizes to the IRS when the value exceeds $600. For example, if you received a $650 or $800 sign-up bonus, your credit-card company will send you a 1099 form.

If you received a credit-card rebate or reward on a business purchase, it’s important to remember that the rebate or reward will have to be deducted from the cost of the product before you take a tax deduction. Sorry, you can’t receive a rebate or reward and deduct the entire purchase price.

For instance, if you are self-employed and purchase a $200 phone and get a $50 rebate, you can’t deduct the entire $200. You need to reduce the tax-deductible amount to $150.

Which Credit-Card Rewards Aren’t Taxable?

A few examples of credit-card rewards that aren’t considered income:

  • Travel mile bonuses.
  • Sign-up bonuses under $600, cashback programs.
  • Accumulated points toward purchases made in the future.

When do credit-card rewards count as taxable income?

Personal vs. Business Credit-Card Rewards

As reported by the IRS, credit-card rewards are taxable if they are considered income. That includes cash gifts or bonuses for signing up for an account as well as bonus travel rewards if they are reportable in a monetary amount.

The challenge comes in assessing the value. In some instances, determining how taxable rewards get reported to the federal government is at the discretion of credit-card issuers.

According to the law, banks, credit unions and credit-card companies are required to report prizes and rewards exceeding $600. If you choose a card with a $650 sign-up bonus, you could receive a 1099 form from the issuer.

However, when using your credit card to make purchases from the miles or points earned, those rewards are typically tax-free. In the eyes of the IRS, they aren’t taxable income: Rather, they are discounts. If you are required to spend a certain amount of money to qualify for a credit-card reward, those rewards aren’t taxable, according to the IRS.

Business Credit-Card Accounts

Rewards associated with business purchases are different from rewards earned using an individual or personal credit card. Rather than taxing rewards, the IRS allows a tax deduction.

For example, you charge $1,400 on your business credit card and earn $40 a cash-back reward. When writing off that purchase as a business-related tax deduction, you could only claim $1,360, not the full $1,400.

Note that when you are reimbursed for any business-related items purchased using your credit card, that money isn’t considered income. However, if you earned rewards for those purchases, more than likely you need to report them to the IRS.

IRS states credit-card rewards are taxable if they are considered income. 

If I’m Being Taxed for Rewards, What Should I Do?

In 2019, the internet went ablaze when credit-card users received 1099 tax forms from major card brands, including American Express, Chase and Discover. Many customers weren’t only surprised but dismayed as they disagreed with the amount reflected on their 1099 forms.

Under these circumstances, there are a couple of options:

1. Contest the Credit-Card Company on the Valuation

One credit-card company, for example, assigns a value of 1 cent a point for membership rewards, Delta, SPG, and Marriott points. However, the company assigns a value of .67 cents a point for Hilton Honors points. In this case, you could try calling the credit-card company to request they reissue the 1099 form at a lower value.

2. Adjust the Valuation on Your Tax Return

If you disagree with an amount reported on a 1099 form but the vendor refuses to adjust it, you have options. Most taxpayers report referral bonuses on Line 21, “Other Income,” of Form 1040. (Talk to your tax preparer for guidance.) It is strongly recommended first reporting the gross amount here.

Failure to do so all but guarantees a letter from the IRS later. You can “back out” an adjustment to reduce the income to your calculation of proper value.

A Final Word on Credit-Card Cash Rewards

While credit-card cash rewards and other incentives are appealing, be aware that you might be signing up for more than you bargained for come tax time.

Pay attention to any tax ramifications before making a decision. Stay on top of your finances and determine whether credit-card rewards are taxable so you can take the appropriate action.