Credit card rewards are typically non-taxable because the IRS views them as rebates and discounts rather than income. However, there are a few exceptions.
If you are a business owner, the amount of cashback or reward points earned on a purchase could reduce your deductible for that item. It would make the rewards taxable.
Rebates and Discounts
Regarding credit card rewards, the IRS typically treats them as discounts, not income. It goes for all the perks you earn through spending, including miles and points you collect from credit card purchases or loyalty programs. In other words, if you pay taxes with a credit card, the fees involved may offset any spending-linked benefits you’d get, especially if you’re looking to rack up a big welcome bonus or hit an introductory yearly spending threshold.
For business credit cards, however, things work slightly differently. TurboTax notes that if you receive cash back for purchasing goods or services, the IRS will typically view these as deductions, not income, so you don’t have to report them when filing your business tax return.
What transpires, though, if you get rewards without making any purchases? It might happen if a credit card company gives you a sign-up bonus or reward for referring someone to open an account. In this instance, even though no purchase was necessary to obtain the bonuses, the IRS will classify them as taxable income. To prevent any shocks during tax season, monitoring your credit card points and other benefits is crucial. For additional information about cashback on tax, click here.
Loyalty Programs
Loyalty programs generate customer data for profitable behavior. However, they can be challenging to track and quantify.
Some loyalty programs offer discounts on specific products and services, while others reward customers for other behaviors. Points-based programs, for instance, provide clients with points for every dollar they spend with a brand that can be redeemed later for free or reduced-price items.
Other programs encourage particular behavioral changes, such as saving at tax time. One such initiative, the Save Your Refund project, partners with local locations and other volunteer income tax assistance programs to encourage non-savers to withdraw part of their refund. The goal is to get people to build a financial foundation to withstand life’s interruptions, such as job loss or unexpected expenses. Saving a small portion of the refund in an FDIC-insured savings account provides an excellent option because it keeps the money away from temptation and out of reach for future splurges. Ideally, the savings should be in a higher-yielding account to earn interest and grow over time.
Non-Spending-Linked Offers
Whether consumers want to get ahead or meet a savings goal, they must have access to a convenient way to save. A dedicated savings account, IRA, or prepaid card savings wallet are great options. This year, taxpayers filing a federal return can use some of their refunds to buy Series I savings bonds.
However, the card-linked offer (CLO) model leaves room for improvement. Currently, consumers must manually activate offers before they shop, and most offers are merchant-specific rather than brand-specific (think: 3% cashback at McDonald’s). It creates a friction point for consumer adoption since the offer isn’t relevant to their shopping needs.
A few players are building a better card-linked offer model that allows consumers to stack offers to solve this. For example, when shopping online on sites, consumers can earn cash back and then use a CLO card to increase their savings. While this may violate terms of service for some programs, it’s a smart way to encourage more savings.
Additionally, the growing number of bank-offered programs allows consumers to find card-linked offers on their banks’ apps and websites. As consumers scroll through promotions, these programs may require more effort but can add to significant savings.
Taxes
Dedicated credit card users can rack hundreds or thousands of dollars in cash back, points, and miles a year. And while this type of reward is great for consumers, the IRS has strict guidelines on taxing bonuses.
The IRS generally views credit card rewards as a rebate, not income. However, this doesn’t mean you don’t need to report the rewards on your taxes. The key is knowing what kind of rewards you’re receiving and how they are used.
For example, if you receive a bonus for opening a savings or investing account and use that money to purchase goods, the IRS might view the bonus as income. In this case, the bonus would be taxed like other investment earnings.
Another way the IRS might treat a cashback is if given to an individual to carry on a business or profession. In this case, the taxpayer can either claim a deduction for the total purchase amount after reducing the cashback or add it to other business expenses and declare it in their income tax return. If you’re unsure how to report your credit card rewards, consult a tax expert or accountant to avoid complications. They can help you track your receipts and ensure you’re filing accurately.
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