Rewards Credit Cards

Do You Need to Tell the IRS About Your Credit Card Rewards?

The IRS generally doesn't care about your credit card rewards—points, miles, or cash back—but there are some exceptions. The main thing you need to be aware of is when you charge business expenses to a cashback credit card, you can only deduct the net expenses after you've received any cash back.

For example, if you earn $20 in cash back credit card rewards for $1000 worth of computer equipment for your business, you can only deduct your net cost of $980. The IRS views these cash-back rewards as a post-purchase discount, and you have to consider it when claiming a deduction, just as if you had used a coupon to save $20 off of your purchase, or received a $20 rebate.

You may also incur a tax liability when you receive a cash bonus for opening up a checking or savings account. Many banks will offer new customers as much as several hundred dollars when they open a checking or savings account and sustain minimum balance.

Unlike credit card rewards for making purchases, these bonuses only require a deposit. Therefore, the bonus you receive is considered taxable income, and the bank will likely issue you a 1099-INT form at the end of the year that you will have to include in your tax filing.

How the IRS Treats Reward Points and Miles

When you travel for business, or use a travel rewards credit card, then you'll have the chance to earn valuable reward points and miles with airline and hotel loyalty programs. In theory, the IRS could consider the value of these rewards as taxable income, or reduce the value of your tax deductions by a particular amount.

But in practice, the IRS is uninterested in doing so. In a 2002 announcement, the IRS declared: "Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel."

It simply doesn't care about reward points and miles, and taxpayers don't have to notify the IRS when they receive them or claim their value on their tax returns.

How the IRS Views Credit Card Rewards

Your points, miles or cash back aren't considered to be income. You had to spend far more on your rewards credit than the value of the rewards you received, so the IRS considers it to be a discount on a purchase, not money that's been earned. The IRS requires that you pay taxes your income, but it only considers your net income after expenses.

For example, if a dealership purchases a car for $9500 and sells it for $10,000, its total revenue is $10,000 but its net income is just $500. And if it spent $600 on advertising to sell the car, then it didn't earn any net income and the seller will have no tax liability for that transaction.

Likewise, if you spent $1000 on your credit card and received $50 in cash back, you haven't earned any money. From the IRS perspective, you've spent a net total of $950, and your spending doesn't create a tax bill if you don't end up with more money than you started with.

Understanding how the IRS views credit card rewards should make filing your taxes simpler and easier.