Can Your Credit Card Rewards be Taxed?
Credit card rewards are tricky in terms of taxes. In fact, the IRS has spoken several times about it. These rewards represent money or free travel that you did not have before, right? It is reasonable to assume they must be taxable. However, these rewards do not exactly have to figure in your tax return. There are exceptions though so read your contract to learn your responsibility.
Information from the IRS
The IRS announced that “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.”
Your credit card rewards fall under “in-kind benefits”. Interpreting the statement above, there is no need to pay taxes on cash-back rewards any more than you would have to pay on that $50 rebate you got when you bought an appliance.
Essentially, rewards are different from income. You did not earn rewards through work, business, or investment. You spent something to get your reward. In fact, what you received was less than what you spent.
Exceptions to take in mind
Be careful if you did not make any transactions. For example, if you received a referral bonus or a signup bonus to open an account. This money is credited to your account before you ever used your card. Technically, this is interest paid to a customer so it should be reported on Form 1099-INT to the customer. Some people report it, others do not. The simple rule is if the interest earned exceeds $10 in a year, you should report it.
Claiming tax deductions for giving away rewards
What if you do not need your cashback and decide to give it to charity? Can you claim a tax deduction for it? The short answer is no. The IRS recognizes rewards points and miles as a gift or a reward from the corporation to the individual. When these are donated to charity, these are not tax-deductible. In short, you did not purchase your rewards so it is not a legitimate deduction. Keep this in mind when your credit card company offers to send your rewards to charity than have it apply to your card balance.
Finally, if you are still unsure about what should or should not go into your tax report in terms of bank or credit card bonuses, consult a tax professional. It can be confusing sometimes so get help if you need to.