For quite some time now there seems to be a lot of confusion around credit card rewards and the taxability of them. Throughout our our Free Facebook Group and Tax Minimization Program we see this topic pop up so we are taking the time to tackle it now!

Before we dig into it, I want to list out different types of credit card rewards we are going to discuss:

• Frequent Flyer Miles / Points
• Hotel Points
• Credit Card Points
• Cash Back Rewards
• Cash Rebates
• Sign-Up Bonus

In most cases, rewards from using a credit card do not need to be reported to the IRS and there is no tax on them. With that being said there are some instances where they may be taxable and we are going to discuss that.

How Are Frequent Flyer Miles, Hotel Points, and Other Credit Card Point Rewards Taxed?

Great news, these are not taxable! Even personal use of business earned miles (or points) are not taxable.

One thing to note is that if you redeem points for business travel, you do not get the cash equivalent value as a business deduction. Example: You trade in 40,000 airline miles for a business trip which is equivalent to $400. You are not able to take a business deduction for the $400 because you did not actually spend that money.

This poses an incredible tax planning opportunity and tip:

• Never Use Points or Miles for Business Travel
  • Instead take advantage of being able to take a business deduction for business travel and pay outright for it (while also racking up more points).
• Use Points or Miles from Business Spending for Personal Travel
  • You can then instead save those points or miles for personal use where it is not taxable and you typically wouldn't get any kind of deduction for it anyways!

Example 1: You need to go to Las Vegas to a convention for work. Instead of wasting points on that, pay using your business credit card and get the business deduction for it.

Example 2: You want to take the family to Disney. Take all of those points you have accumulated (from business CC spending) and utilize them to pay for your hotel and airfare for this 100% personal trip.

How Are Cash Back Rewards and Rebates Taxed?

If you receive a cash rebate reward from your credit card company this is not considered taxable income, great news! But wait, do not get too excited yet. Although it is not considered taxable income it does reduce your initial expense (for businesses).

Example: You purchase $1,800 in office supplies using your business credit card and get a 5% cash back rebate on that for $90. That cash rebate would be used to offset your $1,800 expense so instead of get an expense for $1,800 it would be $1,710.

One thing to note is that you do not get tax deductions typically on the personal side so this "disadvantage" doesn't really come into play as much when it relates to your personal credit card.

This "disadvantage" on the business side does pose a planning opportunity though:

• Look For a Business Credit Card Offering Miles or Points vs Cash Back
  • As we discussed above...

How Are Credit Card Sign-Up Bonuses Taxed?

If you have a requirement to do a certain amount of spending to receive the bonus, these would not be taxable, great news!

However, if you receive a bonus simply for opening an account (or referring someone) and nothing else is needed on your end. Then this would likely be considered taxable income to you subject to ordinary income tax rates. If you earn more than $600 via this method you should be receiving a 1099 from your credit card company.

It is also important to know that a no strings attached (no spending necessary) bonus you received does not include just cash to be considered taxable. It could be miles, event tickets, etc.

This is very likely why you see most credit card companies tie their bonuses to a spending requirement as it not only helps them but it also helps you because then the bonus is no longer taxable due to your spending requirement.

What Happens If I Donate Credit Card Cash Rewards/Rebates to Charity?

Here is a cool tax planning trick. You can donate your credit card cash rebates or rewards to a charity and you still receive a charitable deduction for it. It is not taxable income to you and you also get a charitable deduction, how sweet is that?

If the cash reward is $250 or more the charity must substantiate the donation with a written acknowledgement. Be sure to grab this from them if necessary.

Credit Card Rewards Summary

• Generally, credit card rewards are not taxable.
• Personal use of points or miles earned on a business credit card are not taxable.
• Avoid using points or miles for business travel, instead pay for that in the business and get the tax deduction, and then utilize any points earned for personal travel (where you would not traditionally get a tax deduction either way).
  
• Cash back or cash rewards are not taxable but if you are redeeming them in a business they do offset the initial expense you took.
• Sign-up bonuses are not taxable if there is a spending requirement but if you get them simply for signing up and nothing else, they likely are taxable.
• Referral bonuses typically will be taxable.
• You can donate cash rewards/rebates to charity and still get a charitable deduction.

Check out our Podcast episode on this topic here: