Tax Implications of Credit Card Cash Back

When cash back is not taxable

In most cases, you don't need to report the cash back you earn on your tax return. This applies to both flat-rate and bonus category rewards.

• Rebate on purchases: The IRS views cash back earned on personal purchases as a reduction in the price of the goods or services you bought. For example, if you buy $100 worth of groceries and get $2 back, the IRS sees it as if you only paid $98 for the groceries, not that you earned $2 in income.
• Sign-up bonuses with a spending requirement: The vast majority of credit card sign-up bonuses require you to spend a certain amount within a specific timeframe to earn the reward. Because you have to spend money to get the bonus, it is also treated as a rebate and is not taxable.

When cash back may be taxable

There are specific situations where cash back can be considered taxable income. This generally occurs when you receive a reward without a spending requirement.

• Bank account sign-up bonuses: If a bank offers you cash for opening a new bank account, the IRS considers this interest and will likely send you a Form 1099-INT. The same logic applies to a rare credit card bonus with no spending requirement.
• Referral bonuses: If you receive cash or rewards for referring friends and family to a card, the IRS views this as payment for a service, making it taxable.
• Business credit card rewards: The rules are different for business expenses. While the rewards themselves aren't income, they can affect your tax deductions.
  • Reduced deduction: If you buy a $500 piece of equipment for your business and get $10 in cash back, you can only deduct the net cost of $490, not the full $500.
  • Reimbursement by employer: If you use a personal card for a business expense and your employer reimburses you, the IRS could potentially consider the rewards you earn as a form of employee compensation, making it taxable. However, the IRS has historically not heavily enforced this rule.

How to report taxable credit card rewards

If your credit card issuer sends you a tax form, it will most likely be a Form 1099-MISC for miscellaneous income. This is typically issued for taxable income of $600 or more in a year.

• Even if you don't get a 1099: You are still responsible for reporting all taxable income to the IRS, even if it's less than $600.
• Consult a professional: If you have any doubts about whether your rewards are taxable, it is always best to consult a tax professional for guidance on your specific situation.

Key takeaways

• Spend to Earn = Not Taxable: If you have to spend money to get the reward, it is considered a discount and is not taxable.
• Free Money = Taxable: If you receive a reward without a spending requirement (such as a referral bonus), it is considered taxable income.
• Business Expenses are Different: While business rewards aren't taxable income, they can reduce the amount of your business expense deductions.