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When you use rewards credit cards, you may earn anywhere from several hundred to thousands of dollars a year in rewards. The good thing is that in most cases rewards are not taxable. However, there are exceptions.
Generally, the IRS views rewards as a discount, not as income. So if your credit card allows you to earn 2% cash back on purchases, those would be considered a 2% discount on what you purchased, and discounts aren't taxable. The same applies to points or miles rewards you earn throughout the year on your travel rewards credit card. As long as you spend money to receive rewards, those rewards are non-taxable.
Things get a bit trickier when it comes to sign-up bonuses. Most credit card welcome bonuses are earned once you actually start using the card and spend a required amount to qualify for the bonus offer. For example, you are required to spend $1,500 in purchases with the Citi Rewards+® Card within 3 months of account opening to be able to earn 20,000 bonus points. In this case, rewards are not taxable.
However, there are a few cards that award a welcome bonus automatically upon approval with no spending required. For example, you opened the Amazon Rewards Visa Card and received a $50 Amazon Gift card instantly upon approval. This reward is considered a taxable income.
When you earn rewards that do not require any spending in exchange, your credit card issuer might send you a Form 1099-INT (required for interest income of $10 or more) a Form 1099-MISC (required for income of $600 or more) for the value of the reward. If you are not sent any 1099 form, but you have earned taxable bonuses, you still have to report those rewards bonuses.
Most credit card rewards are not taxable, but you may still earn taxable rewards. Keep track of taxable rewards you earn to make sure you report those rewards as income when you file your taxes. If you are not sure whether your rewards are taxable or not, it's best to consult with a tax professional for guidance.
