If you’re following money expert Clark Howard’s advice on avoiding debit cards, you’re likely earning credit card rewards with all of your purchases.
Great work! But you may be wondering: Do I owe taxes on the cash back rewards I’m earning?
There have been headlines circulating in 2023 about credit card issuers sending out 1099 tax forms for select credit card benefits. That may create some confusion for rewards credit card holders as they prepare to do their taxes.
In this article, we’ll try to alleviate your concerns by helping you better understand which credit card rewards or benefits are potentially a tax liability.
Note: This article is meant as a financial resource. The author is not a tax professional. You should seek the advice of a tax professional if you have questions about your personal credit card rewards income before filing your taxes.
Credit Card Rewards Typically Are NOT Considered Taxable Income
If you’re earning 2% cash back on your everyday purchases or racking up rewards points through a travel credit card, you likely are safe from any sort of tax burden for the rewards you receive.
This is because the Internal Revenue Service (IRS) generally considers this type of reward to be a rebate on spending rather than earned income.
According to the IRS, there is a provision in the tax code that defines credit card rewards as an adjustment to the purchase price:
Section 61 provides that gross income means all income from whatever source derived. A rebate received by a buyer from the party to whom the buyer directly or indirectly paid the purchase price for an item is an adjustment in purchase price, not an accession to wealth, and is not includible in the buyer’s gross income.
Think of this as a similar reason that a grocery store coupon doesn’t count as income. You’ve received it as the result of some action and are using it for a discount on purchases rather than earned income.
Like Clark always says, a 2% cash back credit card is effectively spending 98 cents on every dollar when the dust settles.
What About Welcome Bonuses?
Have you ever noticed that most credit card welcome bonuses have a spending requirement?
While that’s primarily there to incentivize you to start spending with your new plastic, it also may help protect you from being required to count an earned bonus as taxable income.
This spending requirement allows the credit card issuers to consider this welcome bonus as a reward you have earned rather than a gift you have received.
If you’re receiving a welcome bonus that does not require spending, there is a chance that you may receive a 1099-MISC form from your card issuer. If you receive this, that should be properly reported as income on your taxes.
You should seek the advice of a tax professional if you have questions about your specific credit card rewards income scenario.
Some Credit Card Benefits CAN Be Considered Taxable Income
While most credit card rewards are safe from tax liability, you may find that some of your credit card benefits could be a different story.
The value of those could be outside of the “rebate on spending” coverage that your rewards points or cash back on spending receive.
Some examples of card benefits that could potentially be considered taxable income include:
- Complimentary TSA PreCheck or Global Entry membership
- Referral bonuses for getting friends to sign up for a credit card
- Bonuses awarded for signing up for a savings or brokerage account with the issuer
The Points Guy recently reported that Capital One was sending out 1099-MISC forms for some of the above-mentioned credit card perks.
It’s worth noting that you typically would need to accrue $600 or more of these earned benefits in a year for the card issuer to be required to send this form to you.
If you receive a 1099-MISC form from your card issuer that cites benefits as earned income, you may want to consult with the issuer’s customer service to ensure that your rewards and benefits were properly classified. Once you’ve confirmed that, you may want to consult with a tax professional to better understand your tax liability.
Final Thoughts
The fact that the IRS considers the majority of credit card rewards to be rebates on purchases rather than gifts or earned income should prevent most consumers from being required to claim them as taxable income. That’s good news!
However, you should be aware that things are different if you receive a 1099-MISC document from your card issuer for benefits earned with the credit card. In that instance, you may be required to claim those perks as taxable income.
Have you ever had to claim credit card rewards or benefits as taxable income? We’d love to hear about your experience in the Clark.com community.
