Tuesday, February 23, 2016

Something I Was Wondering About

Are credit card rewards considered taxable income by the IRS?:

According to the Internal Revenue Service (IRS), credit card rewards may be taxable as income. The types of rewards and the way in which you receive them determine whether they are considered taxable. In many cases, the rewards are viewed by the IRS as a discount, not as income. For example, a cash-back program for using your credit card is treated as if it were actually a post-purchase discount. There are some credit card reward programs that offer large sign-up bonuses, however, which the IRS may end up counting as taxable income.

Business purchases are completely different than personal purchases, however. If you have a business credit card, a good general rule of thumb is that any rebates on those business purchases are subtracted from the costs of your purchases, reducing the amount that you can deduct from your taxes. This is not technically taxable income, but the net result does increase your tax burden.

Types of common credit card rewards that are not counted as income include cash-back programs, travel miles bonuses, accumulated points towards future purchases and credit card sign-up bonuses that require a financial transaction to be realized.

If, however, the sign-up bonus for your credit card does not require that you make any purchases or charge any amount to your card, then you are likely to receive a 1099-MISC tax form in the mail in conjunction with the bonus. Since the IRS requires that these benefits be treated as income, you must document your rewards on the 1099 form. In some circumstances, the issuing credit card company reports the rewards as income to the IRS and state authorities, but this is usually only the case when state law requires such reports.

You do not necessarily have to receive money in order for the sign-up bonus to be considered taxable. Anything that is provided without being attached to the use of your card – such as airline miles, gifts that are tangible goods or other valuable rewards – are normally taxable income. If you have questions about your credit card reward programs and their tax implications, it is best to consult an actual tax expert and not the issuing credit card company.

If you receive a 1099-MISC form in the mail as part of a rewards program, do not ignore it.
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