Imagine jet-setting around the world, staying in luxurious hotels, or enjoying a first-class upgrade — all thanks to the credit card points and miles you have meticulously earned. These rewards can make dream vacations a reality and elevate your travel experiences to new heights. But before you fully indulge in the perks of your hard-earned rewards, there is one important question to consider: Are these points and miles taxable?

While earning rewards can feel like free money, the tax implications can sometimes turn that dream trip into a potential headache if you are not careful. Understanding whether you might owe taxes on your credit card rewards is crucial for anyone looking to maximize their benefits without any unwelcome surprises.

Types of Credit Card Rewards

Credit. Mozo. Credit Card Rewards.

Credit card rewards come in various forms — points, miles, cash back, sign-up bonuses, etc. Each type has its own nuances when it comes to taxation. The IRS generally classifies rewards into two categories:

1. Rewards that are treated as income in exchange for performing a service (taxable);
2. Rewards that are treated as rebates on spending (non-taxable).

Understanding this distinction is key to ensuring you are compliant with tax regulations.

Note: Rewards considered income by the IRS will be taxed similarly to traditional income (i.e. wages from your job)

Rewards That Are Considered Income

Certain credit card rewards can be classified as taxable income, particularly when they are not directly tied to spending. The IRS treats these rewards differently because they are essentially payments received without an associated purchase. Here is a deeper look at the types of rewards that might be taxable.

Bank Account Sign-Up Bonuses

Bank account sign-up bonuses are a prime example of rewards that are often taxable. Unlike credit card sign-up bonuses, these bonuses are typically awarded for simply opening an account and meeting basic requirements, such as maintaining a minimum balance. Because there is no spending involved, the IRS views these bonuses as interest income, making them taxable. Financial institutions will usually send a 1099-INT form if the bonus exceeds $10, which you must report on your tax return.

Credit Card Referral Bonuses

Referral bonuses can also be considered taxable income. When you refer a friend or family member to open a new account and receive a cash bonus in return, this reward is seen as a payment rather than a rebate. If the bonus exceeds $600 in value, the issuer may send you a 1099-MISC form. Even if you do not receive a 1099 form, you are still required to report this income on your tax return.

Note: This guidance also applies to referral bonuses earned in the form of points or miles. The issuer of the referral bonus (i.e. bank) will calculate a cash equivalent value for the points or miles (normally $0.01 per point or mile), which is then subject to the $600 limit for tax reporting. 

Receiving A 1099-MISC Form

The 1099-MISC form is issued for miscellaneous income, which can include large referral bonuses or other rewards not tied to spending. If you receive $600 or more in such rewards, the form will outline the amount, and you will need to include it in your taxable income for the year. It is important to keep track of any rewards that could trigger this requirement to avoid surprises during tax season.

Rewards That Are Not Considered Income

Credit. Mozo. Earning Rewards On Everyday Spend.

Most credit card rewards, especially those earned through spending, are not considered taxable income. The IRS generally views these rewards as discounts or rebates on purchases rather than income. Let us explore the most common non-taxable rewards.

Rewards Earned From Credit Card Spend

When it comes to earning rewards through credit card spending, most of what you accumulate is considered non-taxable, allowing you to enjoy your points, miles, or cash back without worrying about the IRS. Here are two specific examples:

• Sign-Up Bonuses: Sign-up bonuses are a significant draw for many credit card users. These bonuses, awarded after meeting a minimum spending requirement, are typically not taxable. The IRS considers them a discount on the purchases you have made, not income. For example, if you spend $4,000 in the first three months to earn 100,000 points, those points are seen as a rebate on your $4,000 expenditure, not taxable income.
• Category Bonuses: Many credit cards offer increased rewards in specific categories like dining, groceries, or travel. These category bonuses are treated the same way as sign-up bonuses. The points or miles earned are seen as rebates on your spending within those categories, not taxable income.

Related: The 10 Best Travel Credit Cards

Rewards Earned From Traveling

• Flights: Frequent flyer miles earned through flying or via a co-branded airline credit card are generally not taxable. These miles are considered rebates on the airfare or related travel expenses, allowing you to enjoy free or discounted flights without worrying about tax implications.
• Hotel Stays: Points earned from hotel loyalty programs, whether through stays or co-branded credit cards, follow the same principle. These points are considered a rebate on your spending at the hotel, not taxable income. Whether you are earning points from a paid stay or through a special promotion, the IRS does not view these rewards as taxable.

Rewards Earned From Shopping Portals

Credit. Rakuten. Earning Cash Back Or Points On A Shopping Portal.

Shopping portals, either operating independently (i.e, Rakuten or TopCashBack) or associated with airlines (i.e. AAdvantage eShopping) or hotels, often offer bonus points or cash back when you shop through their links. These rewards are typically non-taxable, as they are considered rebates on your purchases. Whether you are earning extra points on your favorite retail sites or through travel portals, the IRS does not classify these bonuses as income.

Are Credit Card Rewards Reportable On My Tax Return

In most cases, you do not need to report credit card rewards earned through spending on your tax returns. As discussed, these rewards are viewed as discounts rather than income. However, if you receive rewards that the IRS considers taxable, such as bank account sign-up bonuses or large referral bonuses, you will need to report them as income. Keep detailed records of any rewards that could be taxable, and consult with a tax professional if you are unsure about your specific situation.

Where To Report Reward Income On A 1040 Form

If you receive a 1099-MISC form from your credit card issuer, it indicates that the rewards you have earned are considered taxable income by the IRS. These rewards are typically reported under “Other income” on your tax return. To properly report this income, include it under the heading “Other income” on Line 8z of your Form 1040. This amount should correspond with the “Other Income” reported on Schedule 1, Line 22.

Credit. IRS. IRS Tax Form 1040.

Ensuring you accurately report this income is crucial to staying compliant with tax regulations.

Are Cash Back Rewards Reportable On My Tax Return

Cash back rewards earned through credit card spending are generally not taxable. Like points and miles, cash back is viewed as a rebate on the purchases you have made. For example, if you earn 2% cash back on all purchases, that money is considered a discount on your spending, not income. However, cash back bonuses that are not tied to spending, such as those from bank accounts, may be taxable.

It is important to distinguish between these types of rewards to ensure you are reporting accurately.

Final Thoughts

Credit card rewards are a powerful tool to enhance your spending and unlock valuable travel experiences. Fortunately, the majority of rewards earned through spending are not taxable, allowing you to enjoy them without worrying about the IRS. However, be aware of situations where rewards could be considered income, such as bank account sign-up bonuses or significant referral bonuses. By understanding the tax implications of your rewards, you can maximize their value while staying compliant with tax laws.

Remember, while this guide provides a general overview, individual circumstances may vary. It is always a good idea to consult a tax professional if you have questions about how to report specific rewards on your tax return.