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The Internal Revenue Service (IRS) follows fairly clear guidelines when it comes to imposing taxes on cash back earned through credit cards. It views any cash back you earn through spending money as a form of rebate, not income. However, you’ll need to report what you receive as income if you earn cash rewards without spending any money.
Cash back received through business credit cards works slightly differently from the taxman’s point of view. In this case, you need to deduct any amount you receive as cash back from the corresponding business expenses.
Taxes on reward points and miles work in the same basic manner.
- The cash back you earn by spending money on your credit card is not taxable.
- If you earn cash back without needing to spend any money, it might be taxable.
- The cash back you earn via a business credit card affects the expenses you report.
Taxable Cash Back Rewards
The tax treatment of cash back rewards largely depends on the context in which they are earned and the nature of the reward. In some scenarios, you might need to pay taxes on credit card cash back.
For example, some credit cards come with sign-up offers that provide cash rewards or gift cards without requiring you to spend money but simply for opening an account. When no purchase is linked to the cash back you get, the IRS views it as income. This is also the case with cash rewards you may receive in the form of a referral bonus.
Bank Account Bonuses
Opening a new bank account sometimes comes with perks, like a cash bonus for signing up or meeting specific deposit criteria. But while these bonuses might feel like a gift, the IRS usually views them differently. In the eyes of the IRS, this bonus isn't a gift but rather interest earned on your bank account. Why? Because it's a financial incentive provided to you to encourage banking activity. As a result, it becomes taxable income.
Come tax season, don't be surprised if you receive a Form 1099-INT from your bank. This form reports the bonus you earned as interest income, and you need to include it in your yearly tax filings to stay compliant.
Referring friends or acquaintances to a service you love can also sometimes come with financial perks. Whether it's your bank, a shopping app or a subscription service, referral bonuses are a common way businesses attract new customers. However, this bonus is income you receive in exchange for a service — in this case, the referral.
As such, it's generally considered taxable income by the IRS. Depending on the amount and nature of the payment, you might receive a Form 1099-MISC or a newer version, the 1099-NEC, detailing the income. Reporting this as miscellaneous income when you file your taxes is crucial.
Investing often involves potential gains from the market and various bonuses or rewards programs offered by brokerage firms. If you receive a cash bonus for opening a new investment account or depositing a certain amount, the IRS might view this bonus as taxable.
The exact nature of the tax implications can vary based on the specifics of the bonus and the type of account. It's worth noting that the reason behind taxing these bonuses is similar to bank account bonuses — you're earning extra for depositing or investing money, making it distinct from typical cash back rewards on purchases.
Non-Taxable Cash Back Rewards
The IRS typically views cash rewards you earn by spending money on your credit card as discounts instead of income, thereby exempting it from your taxable income. The following cash back rewards are generally non-taxable.
Credit Card Cash Back Rewards
When you use a personal credit card that offers cash back rewards for day-to-day spending, the cash back you earn is typically viewed by tax authorities as a rebate or a discount on your purchases. The rationale behind this perspective is that this form of cash back is akin to you paying a reduced price for your purchases.
For example, if you buy an item for $100 and get $5 cash back, it's as if you've paid $95 for that item. Instead of seeing this $5 as income you've earned, the IRS sees it as a reduction in the amount you've spent, making it generally non-taxable.
Rebates and Discounts
These are straightforward ways in which manufacturers or retailers reduce the effective price of an item or service. A rebate might require the purchaser to take an extra step, like mailing in a form or registering online, to get a portion of their money back.
Whether it's an instant discount at the register or a mailed check as part of a rebate program, both these mechanisms lower the amount the consumer effectively pays for a product or service. Because of this, they aren't treated as income but rather as you paying less for what you've bought.
Sometimes, retailers or service providers offer cash back as an incentive tied directly to a specific purchase. This type of cash back is similar to rebates and discounts.
For instance, a cellphone provider might offer $50 cash back if you buy a particular model. Like rebates and discounts, because this cash back is tied to a purchase and essentially reduces the effective purchase price, it is typically not seen as additional income.
Points and Miles
These rewards are often earned from credit card spending or participation in loyalty programs. While they aren't cash in a literal sense, they are typically treated similarly to cash back rewards when it comes to taxes. If you earn points or miles based on purchases you've made, they're viewed, in essence, as rebates. So, if you use a credit card and earn miles for every dollar spent, those miles are generally seen as a form of discount on your spending and are not taxable.
For example, the 75,000 bonus miles you stand to earn through a credit card by spending at least $3,000 on purchases in the first three months do not qualify as income and are not taxable. However, if there are scenarios where you're directly selling these points or miles for cash, it could complicate their tax treatment.
It's always important to remember that while these general principles apply in many cases, tax situations can be nuanced. Different jurisdictions or regulation changes could potentially affect the tax treatment of rewards. If in doubt or when dealing with significant amounts, consulting with a tax professional is wise.
Declaring Cash Back on Your Tax Return
You need to report all the cash back you earn through non-spending-linked offers on your tax returns.
When it comes to cash back that you earn without having to meet any spending-based criteria, your card provider might send you a Form 1099-MISC: Miscellaneous Income if the value of the cash back you earn is more than $600. If you receive this form, it implies that you need to report the cash back as income on your tax returns. But even if you don't receive this form or the amount is below that $600 threshold, you still need to report all of the non-spending-linked cash back you earn.
Is Business Cash Back Taxable?
The IRS views cash back earned through business credit cards in the same way as consumer credit card cash back. If you earn cash back by spending money, it does not count as income.
You might need to pay taxes on business credit card cash back if it is not linked to any spending because, in that case, it would qualify as income. In addition, the cash back you earn affects the business expenses you report.
If you've earned cash back through any business expense, you need to subtract it from the purchase amount when filing your taxes. For example, if you paid $600 for a business flight and earned $30 as cash back, you need to report the expense as $570.
Retain your credit card statements as documentation of the source of your cash back in case you are ever audited by the IRS. Having a paper trail of the welcome bonus offer and the related spending that earned it will prevent an unwanted tax headache. — Lee Huffman, credit card expert at BaldThoughts.com
Now that you know what type of cash back is taxable, make sure you report it as needed on your tax return. If you don’t have a cash back credit card yet, consider getting one to capitalize on your spending based on factors such as rewards rates, fees, interest rates and added perks.
Frequently Asked Questions
Experts Insight on Taxable Cash Back
- Are cash-backs received from purchases considered taxable income?
- Are there any specific thresholds or limits for cash backs that determine their taxability?
- Are all types of cash back rewards taxable, or are there specific exceptions or exclusions based on the nature of the transaction or the reward program?
- Can cash-back rewards received in the form of gift cards or merchandise be subject to different tax treatment compared to cash rewards?
Professor of Business at Springfield Technical Community College
Sr. Tax Manager & Shareholder at Truepoint Wealth Counsel
Senior Instructor of Accounting, College of Charleston
About Rajiv Baniwal
- IRS. "About Form 1099-MISC, Miscellaneous Income." Accessed September 29, 2023.
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