Maximizing Your Rewards: What You Need to Know About Credit Card Rewards and Taxes
Understanding Credit Card Rewards
As a savvy consumer, you’re likely aware of the benefits of using a rewards credit card. Whether you’re a frequent traveler or focused on earning cash back on everyday essentials, the right rewards credit card can make a significant difference in your budget. But have you stopped to think about how your earnings might impact your tax return?
Rebates vs. Taxable Income
In general, credit card rewards are considered rebates or discounts rather than taxable income. This includes rewards earned on spending and common welcome bonuses. To understand why, consider how you earn these rewards: you must spend money to earn cash back or travel rewards. For example, if you spend $200 on a purchase that earns 3% cash back, you’ll receive $6 back. This is essentially a rebate on your purchase, not taxable income.
IRS Guidance
The Internal Revenue Service (IRS) doesn’t specifically address credit card rewards in its taxable and non-taxable income guidance. However, a 2010 IRS statement suggests that rewards are considered rebates and are not includible in gross income. According to Daniel Kenny, CPA, CFP, founder of FI-nancial Planner, “They said in that case that credit card rewards are considered a rebate or reduction in the cost that you paid… If you get a 2% reward and you bought a $100 gadget, the 2% reward is a reduction in your cost — so your cost is now $98. So in an individual’s case, that means it’s not taxable income.”
Exceptions to the Rule
While most credit card rewards are not taxable, there are exceptions. If you receive a cash bonus for opening an account without spending any money, this may be considered taxable income. Similarly, referral bonuses earned without spending money may also be taxable.
Reporting Taxable Rewards
If you earn taxable rewards, your credit card issuer may send you a 1099-MISC form outlining the taxable rewards you’ve earned over the year. Even if you don’t receive a tax form, you may still need to report the earnings on your tax return. It’s essential to keep track of any taxable rewards you receive and consult with a tax professional to ensure you’re filing correctly.
Maximizing Your Rewards
To get the most value from your spending, consider using top rewards credit cards to maximize your cash-back, points, and miles rewards. Cards like the Chase Sapphire Preferred, Capital One Venture Rewards, and Blue Cash Preferred Card from Amex offer solid rewards earnings in various categories.
Expert Advice
Remember, the best way to ensure you’re filing your credit card rewards correctly is to consult with a tax professional about your specific situation. An expert like an enrolled agent (EA) or certified public accountant (CPA) can offer personalized advice and help you file accurately.
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