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With ongoing changes to tax laws by the federal government, people are looking for new ways to save money. Saving money on taxes applies to credit cards, even rewards on those cards. To stay on top of your finances, it is important to know whether credit card rewards are taxable so you can take the appropriate action to protect yourself and enjoy the benefits.
Credit card companies are notorious for dangling “carrots” in front of potential cardholders as a way of getting them to open an account. As an enticement, most issuers offer incredible travel miles, cashback rewards, and sign-up bonuses. While these incentives are appealing, be aware that you may be signing up for more than you bargained for, and not in a good way. While there are benefits that go hand in hand with earning rewards, you need to pay close attention to any tax ramifications before making a decision.
Personal vs. Business Credit Card Rewards
As reported by the IRS, credit card rewards are taxable if they are deemed as income. Included are any gifts or bonuses that you get in exchange for signing up for an account. As part of this are bonus travel rewards, in particular, if they are reportable in a monetary amount. The challenge comes in assessing their value. The reason is that in some instances, determining how taxable rewards get reported to the federal government comes at the discretion of credit card issuers.
What it comes down to is that according to law, issuers of credit cards, including banks, credit unions, and credit card companies, are mandated to report prizes and rewards of anything more than $600. Therefore, if you choose a card with a $650 sign-up bonus, you could receive a 1099-MISC form from the issuer.
However, when using your credit card to make purchases from the miles or points earned, those are usually tax-free. In the eyes of the IRS, those are not income but discounts. Also, if you are required to spend a certain amount of money to qualify for a reward, those are also not taxable, according to the IRS.
Trying to determine if your individual or business credit card rewards are taxable is often confusing. Therefore, you should read all of the terms and conditions, which should provide answers. If not, and you do not receive a 1099 form, there is no action for you to take. Tax experts claim that credit card issuers rarely send out 1099 forms for rewards points on credit cards.
However, if you receive a form, instead of tossing it out, talk to an accountant or tax professional to see what you need to do. The tracking system used today by the IRS is sophisticated, so if you do not report a 1099 form on a tax return, the system could be triggered, leading the IRS to send you a letter and possibly impose a penalty.
Business Credit Card Accounts
Rewards associated with business purchases are different from rewards earned using an individual or personal credit card. Rather than taxing rewards, the IRS allows you to take a tax deduction. For example, if you charge $1,400 on your business credit card and, as a result, earn $40 as a cashback reward, when writing off that purchase as a business-related tax deduction, you could only claim $1,360 as opposed to the full $1,400.
You also need to know that when reimbursed for any business-related items purchased using your individual credit card, that money is not considered income. However, if you earned rewards for those purchases, more than likely you need to report them to the Internal Revenue Service.
A few examples of credit card rewards not deemed as income are travel mile bonuses, credit card sign-up bonuses under $600, cashback programs, and accumulated points toward purchases made in the future. One important note, to sign up for a credit card account, you don’t necessarily get money. However, anything attached to using your card, such as gifts, valuable rewards, and airline miles, are income, and therefore taxable.
As stated, understanding whether credit card rewards are taxable is difficult. If you need help, make sure to get it. That way, you pay as little in taxes as possible while enjoying the benefits of your card.
Author: Jeff Gitlen
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