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Rewards credit cards can help you earn cash back, enjoy travel perks or save on airfare and hotel stays. But do you have to pay taxes on the credit card rewards you earn? Credit card rewards earned by making purchases generally aren't taxable, but bonuses earned without making purchases may be. Here's how to figure out if you need to report your credit card rewards on your taxes.
Types of Credit Card Rewards That Are Taxable
Cash bonuses from a rewards credit card may be taxable, depending on what you have to do to earn the bonus.
Intro Bonus
Many credit cards offer introductory welcome bonuses. Typically, you must spend a set amount of money on the card within a certain time period in order to earn the bonus. For instance, you might get a $150 cash back bonus for spending $1,000 on your new credit card within the first three months of opening an account. A cash bonus that requires making purchases is not taxable.
However, some credit cards give you a bonus just for opening an account, with no need to purchase anything. If you receive a bonus when you're approved for a credit card, it's considered taxable income.
Referral Bonus
Credit card companies sometimes offer bonuses when you persuade friends and family to sign up for a credit card. Card issuers typically provide a unique link, connected with your credit card account, that friends and family must use to apply for the card. This allows them to track your successful referrals and reward you with a bonus.
Money from referral bonuses is considered taxable income and should be reported on your income taxes.
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Types of Credit Card Rewards That Are Not Taxable
Credit card rewards you earn by making purchases with the card aren't considered income and are not taxable. This includes rewards miles, points and cash back. The IRS treats these types of credit card rewards as rebates or discounts on your purchases, rather than income.
Do You Have to Report Credit Card Rewards on Your Tax Return?
Credit card rewards that meet the criteria of taxable income should be reported on your tax return. This includes any welcome bonuses that didn't require spending and any referral bonuses you earned.
Typically, your credit card company sends you a Form 1099-MISC if you earned $600 or more in taxable bonuses in one year. You should submit this document with your income taxes. However, even if you don't get a Form 1099, you should still report any taxable credit card bonuses you received.
Are Business Credit Card Rewards Taxable?
Business credit card rewards are treated the same as personal credit card rewards when it comes to taxes. Bonuses earned from referrals or simply for opening a credit card account are taxable. Rewards or bonuses that require making a purchase are not.
Although the IRS doesn't tax business credit card rewards you earn from purchases, these rewards can impact the amount of business tax you owe. For example, suppose you buy a business laptop for $1,000 using a credit card that offers a 2% cash back reward. You'll receive a $20 reward, reducing the net cost of the laptop to $980. Since you can only deduct net costs on your business taxes, you'll need to deduct $980, not $1,000.
Should I Pay My Taxes With a Credit Card?
You can pay your taxes with a credit card to earn rewards, but it's generally not a good idea. Convenience fees for using a credit card typically surpass any rewards you may receive.
The IRS uses three payment services to process credit card payments. When you use a credit card to pay your taxes, each charges a percentage of your payment as a convenience fee:
- PayUSAtax: 1.82%
- Pay1040: 1.87%
- ACI Payments: 1.98%
Suppose you pay $5,000 in taxes using a credit card that earns 2% cash back. You'd earn $100 in cash back rewards, but pay between $91 and $99 in convenience fees, depending on the payment service you choose.
Putting a large tax bill on your credit card can negatively affect your credit score by increasing your credit utilization ratio. And unless you pay off the balance when your credit card payment is due, the debt begins accruing interest. Since the average credit card annual percentage rate (APR) is at 21.47% as of November 2023, according to the Federal Reserve, that can quickly add up.
However, if you qualify for a credit card that offers an introductory 0% APR on purchases, using it could buy you 15 to 21 months to pay Uncle Sam. If you don't have the cash to pay your taxes, a 0% introductory APR credit card offers a way to extend your tax payments over time without incurring costly interest. Just be sure to pay off the balance before your promotional APR expires, or interest will begin adding up.
Getting a personal loan or setting up a payment plan with the IRS are other options if you can't pay your tax bill. IRS payment plans charge an 8% APR plus a 0.5% failure-to-pay penalty on your outstanding tax balance, while the average APR on a personal loan is 12.35% as of November 2023, according to the Federal Reserve.
The Bottom Line
Strategically spending with rewards credit cards can bring big benefits, but it's important to understand any tax consequences that come with your rewards. Rewards credit cards generally require good to excellent credit. Before applying for a card, it's a good idea to check your credit report and credit score and take steps to improve your credit score if necessary.