Are credit card cash back taxable?

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The deadline for filing 2021 tax returns, which falls on April 18 this year for most taxpayers, is fast approaching. Most taxpayers received their W-2 forms and other income information between January and February, and many are still preparing to file before the deadline. However, if you have at least one rewards or cashback credit card and are still preparing your tax returns, you may be wondering if the rewards you earned in 2021 are taxable. Here’s everything you need to know.

What is Credit Card Cash Back?

Some credit card issuers offer cash back and other rewards each time an account holder makes a qualifying purchase using their line of credit. This type of offer can be quite bankable over time, often allowing customers to use their cash back to pay off their outstanding credit card balance. This option is one of the reasons why cash back credit cards are among the most popular on the market.

Most card issuers offer cash back credit cards with different features to suit different lifestyles and needs. Here’s a look at some of the best options available today:

Refund card Benefits
Hunting Freedom Flex
  • $200 welcome bonus
  • 5% on rotating categories
  • 5% on trips booked through Chase Ultimate Rewards
  • 3% on meals
  • 3% in pharmacies
  • 1% on all other purchases
  • American Express Blue Cash Preferred Card
  • $300 welcome bonus
  • 6% in US supermarkets
  • 6% on eligible US streaming subscriptions
  • 3% on public transport
  • 3% at US gas stations
  • 1% on other qualifying purchases
  • Citi Personalized Payment Card
  • $200 welcome bonus
  • 5% off the cardholder’s eligible top expense category
  • 1% on all other qualifying purchases
  • Find out Cash back
  • 2x Cashback Match bonus on purchases made in the first year
  • 5% off regular purchases that fall into rotating categories
  • 1% on all other purchases
  • Active Wells Fargo payment card
  • $200 welcome bonus
  • Unlimited 2% cash back on purchases
  • Information is accurate as of April 5, 2022.

    Credit card cash back rules generally vary. The issuer will specify in the contract which purchases are eligible for specific cash back rates and other rewards. A travel credit card, for example, can reward users for buying plane tickets, but not for groceries or gas. A cashback card, on the other hand, would likely reward those daily purchases.

    Redeem Cash Back

    Cash back is like real money, but sometimes there’s a catch. Depending on the card, issuers may require users to accumulate a certain amount before redeeming their rewards. Others give users their money at the end of each billing cycle or quarter. Here are some common ways cardholders get cash back:

    • Statement credit, which can be applied directly to paying their bills
    • Direct deposit or check, which can be used for more purchases or left intact in a checking or savings account
    • Gift cards, redeemable at participating merchants

    Some issuers may limit the amount cash back cardholders can earn during each billing cycle. This amount is always indicated in the agreement contract.

    Types of rewards

    While some credit cards offer cash back, others offer account holders miles, bonuses, or transferable points. For trading purposes, users may think these rewards are about the same. Yet, for the IRS, they fall into two entirely different categories:

    1. Discounts and rebates

    These are bonuses and rewards that users earn for qualifying purchases or from participating merchants. Here are some examples :

    Points and cash back

    As long as these rewards result from the daily expenses of the cardholder or are a gift from the issuer in exchange for a few transactions (a welcome bonus, for example), the IRS does not consider this income. Since the cardholder uses their own money to earn cashback and points, the rewards are considered cashback. Cash back falls into the same category as vouchers, coupons or discount codes.

    Miles and travel rewards

    Travel cards typically offer members points and miles for booking accommodations, transportation and flights, as well as restaurants. These rewards are almost never taxable. As with rewards and cash back points, the IRS treats miles earned through personal travel expenses as a rebate or rebate.

    In some cases, miles earned from business travel could theoretically be considered income, as noted by Forbes Advisor. However, in 2002, the agency issued an announcement stating that it would not pursue enforcement of the tax on frequent flyer miles, whether earned on personal or business travel. The IRS has not changed its position on the matter since.

    2. Taxable income

    When financial institutions give cardholders money, gifts, or points when nothing has been done to earn them, this is considered income. Here are some examples of how this can happen.

    Sign-up bonus

    Sometimes card issuers offer special promotions to encourage people to open a new credit card account. This can be in the form of redeemable points, frequent flyer miles or even cash deposits.

    Most welcome bonuses are not taxable because they require users to spend a predefined amount of money or make a few transactions before they can collect them. On the other hand, if the issuer offers a monetary inducement just to open a credit card account with them, then they are subject to taxes.

    Referral bonuses

    Some financial institutions like their long-time customers to bring in more business. That’s why they offer incentives for cardholders to refer their friends and family. When a bank gives money to cardholders for each successful application resulting from their referrals, this is considered taxable income. The IRS considers this to be a commission for a sale made by the issuer.

    So, are credit card rewards taxable?

    The answer is usually no, credit card rewards are not taxable. The IRS considers most credit card rewards – including cash back – as a rebate, and the rebates are not taxable. Receiving 1% cashback on $1,000 in purchases, for example, is considered a $10 cashback that cashback credit cardholders don’t need to claim. Some issuers may disclose that any rewards earned through their cashback program may be reported as income. In this case, cardholders will usually receive a 1099-MISC form.

    Tax requirements on cash back, rewards, miles and credit card points depend on the situation. It’s not in how cardholders choose to redeem their rewards, but whether they earned them by spending their own money.

    Editorial Note: This content is not provided by American Express. Any opinions, analyses, criticisms or recommendations expressed in this article are those of the author alone and have not been reviewed, endorsed or otherwise endorsed by American Express.

    Our in-house research team and on-site financial experts work together to create accurate, unbiased and up-to-date content. We check every stat, quote and fact using trusted primary resources to ensure that the information we provide is correct. You can read more about GOBankingRates processes and standards in our Editorial Policy.

    About the Author

    Daniela Rivera is a bilingual freelance content creator with a background in advertising and media. She holds a degree in communication sciences and more than 10 years of professional experience as an editor. She specializes in generating engaging and creative concepts and copy for advertising, e-commerce, blogs, podcasts and social media.

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