Are credit cards rewards taxable income?

Credit users love their credit card rewards points.

In a CreditRatings.com study of top credit card rewards for U.S. customers, 90 percent of those surveyed said their card rewards were either "somewhat valuable" or “extremely valuable.”

Another 60 percent of credit card users said they would spend more at retailers who offer card rewards, according to WalletHub.com. But are these rewards taxable?

Credit card rewards and tax liabilities

One aspect of credit card rewards that many consumers aren’t as clear about is the impact of these rewards on a card user’s tax liabilities.

In fact, the rules on card rewards and taxes aren’t exactly clear, financial experts note.

“In general, the Internal Revenue Service doesn’t view credit card rewards as taxable income, because they view those payments as rebates and not as taxable benefits conferred to the cardholder,” said Riley Adams, a licensed certified public accountant at Google, in San Francisco.

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However, in the event of receiving referral fees for bringing someone to the company or opening an account for a lump sum bonus, a taxable event is in play.

“For example, if you receive a $300 sign-up bonus for opening a bank account, this counts as taxable income,” Adams said. “But if you receive 1.5 percent back on your credit card spending, this will not count as income.”

For most credit card rewards programs, the IRS takes the position that the rewards themselves are discounts rather than taxable income.

“That’s because the credit card companies are offering you some sort of reward as an incentive for you to purchase a commodity, as opposed to simply giving you a reward for nothing,” said Mike Herzog, a tax attorney with Eckert Seamans Cherin & Mellott, LLC, a law firm based in Pittsburgh, Pa. “Due to this 'quid pro quo' exchange with the credit card company, any reward received as a result of making a credit card purchase is treated as a discount that you are not required to report on your income tax return.”

For instance, some credit card companies like Citibank or Bank of America offer significant sign-up bonuses when you open a new credit card account with them.

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“In these situations, those credit card companies are taking the position that the sign-up bonus might be subject to income tax,” Herzog said.

That’s why it’s important to read the fine print on credit card applications, which might indicate the credit card company’s stance on the tax liability issue.

“Credit card companies are required by law to issue you an IRS Form 1099-MISC (or other appropriate form) if they pay you $600 or more,” Herzog said. “Therefore, if you receive a sign-up bonus that equals $600 or more, your credit card company will likely issue you a Form 1099-MISC, which you then must include as taxable income on your tax return.”

Key factors on credit card rewards

Understanding key distinctions on how credit card rewards are paid out matters, too.

A good example is the taxation of frequent flyer miles. “According to the IRS, frequent flyer miles programs are generally not taxable,” Herzog said. “The IRS has provided guidance indicating that miles earned through travel with an airline or by using a credit or debit card constitute nontaxable rebates.”

“However, if the frequent flyer miles are convertible to cash, then the IRS takes the position that the cash received is a taxable fringe benefit subject to income tax,” he added. “Keep these rules in mind when determining the taxation of any frequent flyer miles you receive.”

If you do receive a Form 1099-MISC from your credit card company, don’t ignore it.

“In that scenario, it’s likely that you’ll need to include the amount reported on the 1099 tax form on your income tax return,” Herzog said. “Then it’s time to talk to your tax professional. If you don’t receive a 1099 from your credit card company, then any reward you receive is likely not taxable income and you do not have to report it on your tax return.”