Are Credit Card Cash Rewards Taxable?

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Another frequently asked question that comes up in the credit world: “Are credit card cash rewards taxable?” Often, this question heats up around April, right before taxes are due.

And with all the cash back rewards credit cards around these days, it’s no wonder consumers are concerned that they may be taxed for things like free airline tickets and cash back rewards.

Credit Card Rewards Aren’t Income

When it comes down to it, you are taxed on income you make. But credit card rewards aren’t considered income, and are in fact a type of rebate; the credit card issuers even refer to them as such.

American Express lists their cash back reward under fees and adjustments, so again, it doesn’t appear to be income.

If you think about it, by electing to use your credit card to make purchases you could be making with cash or a debit card, you are receiving a price reduction or discount from the card issuers.

While it’s not as direct as normal rebates or coupons, which typically come from the manufacturer, it draws enough parallels to be treated similarly.

Additionally, the cost of the items we buy is higher because of the existence of credit cards.  If it weren’t for credit cards, everyday goods would be cheaper because merchants could charge us less.  Why? Because merchants pay costs involved with accepting credit cards, and that cost gets passed on to consumers.

So we’re essentially just getting our money back by using credit cards.  And not even all of it, just some of it. Those who pay with cash instead of credit card simply lose out as a result of the higher prices.

So you shouldn’t worry about paying taxes on credit card rewards, as they’re just a discount/rebate you receive for using your credit card.

Unfortunately, the IRS hasn’t made it 100% clear if this is indeed the case, so questions and worries still persist.

I did a search over at the IRS website and couldn’t find anything that addresses the question specifically.

Upfront Credit Card Bonuses Aren’t Taxable Either

While that’s all good and well (for the most part), there are different types of rewards offered to cardmembers. For example, a big thing these days is the opening bonus used to lure in new customers.

Take the $100 welcome bonus offered to new Blue Cash Everyday cardholders, or the big bonuses offered to Chase Sapphire Preferred cardholders. Because these are “sign-up bonuses,” and not traditional credit card points or rewards, the tax rules get even more murky.

But again, these opening bonuses are treated as rebates because the consumer must spend money to obtain them. For example, both opening bonuses cited above require a minimum spend in order to receive the cash bonus.

If you don’t meet the spending requirement, you don’t get the bonus, i.e. rebate. Also note that many credit cards accompanied by big upfront cash back bonuses carry annual fees.

So again, you’re paying a fee to get the rebate in the first place, and the credit card issuer probably expects you to pay them more than they pay you in the long run via fees and interest.

The IRS Wants You to Earn Credit Card Points!

Funnily enough, the IRS actually promotes the use of a credit card to file taxes electronically, and notes that you could even earn miles, points, rewards or cash back from card issuers!

Heck, if they’re saying so, it must be a safe tax-free move.

That’s the way I’m treating it unless I hear otherwise, though I would expect an advisory regarding the topic in the near future as rewards become bigger and more commonplace.

As always, it is recommended that you consult your accountant or tax advisor to be 100% certain any and all credit card rewards aren’t taxable to avoid any surprises.

Charitable Donations Using Credit Card Points Aren’t Tax Deductible

One more thing while we’re on the subject of taxation.

Some of the major credit card issuers such as American Express, Bank of America, and Citibank now offer donations to charity as a way to redeem points earned through the use of their credit cards.

While this sounds like a very humane and generous option for credit card holders, it should be known that the contributions made to charities using credit card points cannot be deducted from your taxes.

Unfortunately, by law it is the credit card issuer who is deemed the one donating, and thus only they can deduct the tax. If you’re looking for a way around it, exchange your credit card points for cash value, then write a check to the charity of your choice.

Aside from losing out on the tax-deductible benefit of donating via credit card points, you’ll also be paying an arm and a leg to donate a small amount. A simple $50 donation will cost anywhere from 5,000-6,000 points.

And if you use your own money, you’ll get a wider selection of charities to choose from, as opposed to the relatively small number offered by the credit card issuers.

Related: Paying your taxes with a credit card.

Author: Colin Robertson

Colin created this blog after spending several years in a job that required him to scour credit reports on a daily basis. His goal is to help individuals better understand their credit and get the most out of credit cards.

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