Are Credit Card Rewards Taxable? - Palma Financial

Like most credit card users, you’re probably excited about getting cashback rewards on your purchases. Those rewards can make your card worth keeping and help you build up a credit score. But you might be wondering: are credit card rewards taxable? In most cases, the answer to this is no, though there are some exceptions. This article will discuss the tax implications of getting cashback rewards on credit card transactions.

What Are Cash Back Rewards?

Cashback rewards are one of the most popular benefits of using credit cards. The rewards you get depend on the card and how much you spend, but they can be anywhere from 1% to 6%. These cashback rewards are different from points because you do not need to spend a certain amount of money to earn them. For example, if you spend $1,000 on your credit card with 3% cashback, you’ll get $30 back.

Credit card companies like to use cashback rewards programs for a few reasons. For one, it keeps customers loyal to the card company. Second, it is an enticing benefit to attract new cardholders. Third, it keeps customers spending money. When customers spend money on their cards, they might also be paying interest rates.

Are Credit Card Rewards Taxable?

The cashback you receive on purchases is considered a rebate and is not taxable income. However, there are some exceptions.

The IRS considers it taxable if one earns rewards from their credit card, free of any spending requirements. For example, if you get a new credit card and get a no-strings-attached $500 welcome bonus – where you receive $500 simply for opening the account – that money may be taxable.

The same goes for referral bonuses. If you receive a cash bonus for recruiting someone and they open a card, you’d be required to report that as income on your taxes.

A 1099 is an IRS form that proves a business paid a non-employee. If you earn taxable credit card rewards or cashback, you might need to file a 1099 form for the year you earned the rewards. In this case, your credit card company is the business, and you are the non-employee.

How do I know if I owe taxes on credit card rewards?

Unless you’re collecting dozens and dozens of referrals, you probably don’t. Again, you do not have to pay taxes on offer rewards as long as they have spending requirements attached. This is even if you earn rewards in the 100s of thousands of dollars.

Credit cards that give bonuses without needing to purchase anything are taxable, so you should keep this in mind again.

When tax time does come around, and you’re still not sure if you owe taxes on your rewards, you should seek the advice of an accountant or other tax professional.

Have More Questions? Palma Can Help

If you have any questions about taxable income or other are credit card rewards taxable questions, please do not hesitate to reach out to Palma Financial today!