Users of some credit cards benefit from receiving a certain percentage of purchases made. When the amounts are high, the cashback will be increased. However, because the IRS is very strict about the income received by taxpayers, there is a question as to whether cashback is taxable.
There is no concrete guideline regarding cash back on credit card purchases and taxes. However, we will specify below the types of rewards that must be reported to the IRS, among other questions in this regard.
How tax rebate programs work
It is true that in some occasions, rewards are considered as a refund or discount, and not as an income. In the case of rewards programs for making purchases with your credit card, it is treated as a rebate after the purchase.
However, some of these benefit programs give away plenty of prizes for enrolling in them, which the IRS may view as taxable income. In this sense, the U.S. tax legislature considers any cash back earned by spending money to be a rebate, not a gain.
But the confusion lies here: what happens when you get cash back without spending money? Typically in this particular case, it applies as an income and must be declared.
Which cashback programs are considered income?
One of the most recurrent is Travel Miles. The accumulated points are used for future purchases of airline tickets, hotel stays, etc. Because they are rewarded, discounts are applied directly as a balance credit, i.e., no cash is received, and it is a non-taxable reward.
Now, let’s look at other scenarios in which cashback is considered taxable:
- Bonuses for signing up for a new credit card. Some do not require any purchase to be made to obtain them. So, when they are given in cash for the simple fact of opening the account, it is likely a taxable transaction. If so, they fall into the category of extraordinary unearned income. But it is worth clarifying that they are not a refund since you have yet to spend money to be characterized.
- Return of interest or investments. When the cashback comes from one of these, because you have invested, such as a fixed term, it may also be taxable. Let’s say you have a savings account with this benefit, and you receive daily earnings from the money you have in it. For this reason, you will have to file it with the IRS as additional income.
Remember, tax laws vary from state to state. To be sure what should or should not go on your annual tax return, mainly if the cashback is taxable, check the legislation on this matter or consult an accountant who is an expert in tax matters.
What happens if I have to declare my cashback?
If so, your credit card provider will provide you with a 1099-MISC form. It is used when you have to report several incomes if the cash back you obtained is higher than $600.
Concretely: when you receive this form, it is clear that declaring the refund as income in your income tax return is mandatory. But only rely on it if you received the document. You must declare cash refunds that are not linked to a cash expense, even if they are smaller than the one indicated.
Remember that cash rewards or discounts are not considered taxable as long as they result from a purchase for an incentive or promotion from a store or your credit card provider. If this is the scenario, they are considered a discount off the purchase price rather than income.
Is Cash Back Taxable?
The same logic applies to the use of consumer rewards programs. If the business gets cash back because it made a monetary transaction, it does not apply as income and will not be taxable.
The opposite is when you have to pay taxes on the cashback from the credit card when it is not linked to any expense. The difference is that the cash back earned by the business affects the declared costs.
When you earn cash back for any business expense, it is subtracted from the purchase amount to report the tax. So, if you paid $300 for a business trip and were reimbursed $15, the expense is reported as $285.
In other words: the cashback amount is considered a reduction of the business expense, and the net amount (original purchase minus cashback) is the deductible expense for tax purposes.
Other cases where cashback is and is not taxable
While travel points and miles from credit card travel programs are generally not taxable, they are considered income when you receive them without spending money. They should be reflected on your tax return. If in doubt, check with the card provider for the specific value that must be declared. But keep in mind the following situations:
- Credit card bonuses are also generally not taxable, unrelated to an expense or purchase requirement. Therefore, the IRS exempts those receiving this benefit from taxation as it is considered a reimbursement.
- Rewards for opening a bank account or applying for a credit card with no money involved could be taxable income.
Can I pay taxes with a credit card?
Yes. The IRS places no restrictions on tax payments so that you can pay your taxes with a credit card. They usually work with three leading credit card companies. However, specific fees apply for using this service.
- Gravier, Elizabeth. “Are Credit Card Rewards Taxable? Tax Info for Points, Miles, and More.” CNBC, CNBC, 4 Feb. 2020. https://www.cnbc.com/select/are-credit-card-rewards-taxable/.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.