Credit Card Rewards: How Do They Affect Your Taxes?

Credit card rewards are pretty great. They enable you to earn free money, travel, and other incentives just for using your card. However, you may be wondering if these rewards, especially in the form of money, affect your taxes. The good news is that, in most cases, they don’t!  

Why Aren’t Rewards Taxed?

The IRS loves to tax anything and everything, right? So, why doesn’t it want to tax credit card rewards?

Well its position on these benefits is that you’re just getting a rebate on money you’ve already spent. It’s a reward, but it’s not income since you didn’t earn it by working or running a business. It’s basically an exchange or incentive for doing business, and because you had to spend money to make money or to earn other rewards, and because you spent more than you received, the IRS does not feel the need, at least right now, to tax those rewards.

Special Cases

You’ll notice that, earlier, we said the IRS doesn’t tax these rewards in most cases. That means there are a few, rare exceptions.

If you didn’t spend something to earn something, in terms of credit card rewards, then you may have to pay taxes on what you earned. If you got a referral bonus for opening an account, for example, or if you received more than $10 in interest on an account, then you should report that money as income and include it on your taxes.

Deductions

Sometimes, people decide to give away those nice bonuses or incentives they earn from their credit card companies. If you do so, that’s great. In fact, some card companies even give you the option to allocate your money to an approved charity through them. But, don’t expect to be able to claim a deduction for your gift. The IRS does not consider this a legitimate deduction.

For most people, credit card rewards do not affect their taxes in any way. If you’re worried that they might in your case, however, don’t hesitate to contact a qualified tax professional.