With tax season upon us, make sure you’re aware of any tax implications attached to the points, miles, and cash back you’ve earned from rewards credit cards.
The good news is that rewards you earn from a credit card welcome bonus and ongoing spending are generally considered a rebate, not taxable income.
That said, with business credit cards, the rewards you earn can affect you how much you’re able to deduct as as business expense.
If you earn points, miles, or cash back for opening a bank account, that bonus is typically taxable — you’ll likely receive a 1099 form in the mail. Credit card referral bonuses are usually taxable as well.
Always consult with your accountant if you’re in doubt about whether certain rewards need to be reported on your tax return.
See Business Insider’s list of the best rewards credit cards »
The world of rewards credit cards can be a very lucrative one. The Chase Sapphire Preferred Card, for example, offers new cardholders 60,000 points after they spend $4,000 in the first three months — and you’ll earn 2x points on all travel and dining purchases.
As long as you’re paying your balances in full each month and not spending more than you can afford, there’s little downside to earning points and miles, right? With tax season approaching, you don’t want to be taken by surprise when it comes to any taxes owed on your rewards balances.
While in most cases the points, miles, and cash back you earn with credit cards aren’t taxable, there are a few exceptions you should be aware of. So with the caveat that you should always account your accountant and lawyer for tax and legal advice, let’s take a look at some of the tax ramifications of credit card points, airline miles, and hotel points.
Keep in mind that we’re focusing on the rewards and perks that make these credit cards great options, not things like interest rates and late fees, which will far outweigh the value of any points or miles. It’s important to practice financial discipline when using credit cards by paying your balances in full each month, making payments on time, and only spending what you can afford to pay back.
Points are usually considered a rebate; not taxable income
The IRS issued a memorandum in 2010 addressing the issue of whether credit card points are taxable. It clarified that, generally speaking, credit card points and cash back are held to be discounts or rebates on purchases. So if you earn 2% on a $100 purchase, that $2 is not extra income but considered a $2 rebate on your $100 purchase. The same is generally held for airline miles, hotel points, or other types of credit card rewards. That means that in most cases, miles, points and cash back from credit cards are not required to be reported to the IRS as income.
One possible exception is if you apply for a card where you get a bonus without …read more
Source:: Business Insider – Finance