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Understanding Taxable and Non-Taxable Credit Card Rewards

At O1ne Mortgage, we prioritize educating our clients about financial matters, including the nuances of credit card rewards and their tax implications. If you have any mortgage service needs, feel free to call us at 213-732-3074. Our team is here to help you make informed decisions.

Types of Credit Card Rewards That Are Taxable

Credit card rewards can be a great way to earn extra benefits, but it’s important to know which rewards are taxable. Generally, cash bonuses from credit cards may be taxable depending on how they are earned.

Intro Bonus

Many credit cards offer introductory bonuses that require you to spend a certain amount within a specified period. For example, you might receive a $150 cash back bonus for spending $1,000 within the first three months. These bonuses are not taxable. However, if you receive a bonus just for opening an account without making any purchases, it is considered taxable income.

Referral Bonus

Some credit card companies offer bonuses for referring friends and family. These referral bonuses are considered taxable income and should be reported on your tax return.

Types of Credit Card Rewards That Are Not Taxable

Rewards earned by making purchases with your credit card, such as miles, points, and cash back, are not considered taxable income. The IRS views these rewards as rebates or discounts on your purchases.

Do You Have to Report Credit Card Rewards on Your Tax Return?

If you earn credit card rewards that are considered taxable income, you must report them on your tax return. This includes any welcome bonuses that did not require spending and any referral bonuses. Your credit card company will send you a Form 1099-MISC if you earned $600 or more in taxable bonuses in one year. Even if you don’t receive this form, you should still report any taxable bonuses.

Are Business Credit Card Rewards Taxable?

Business credit card rewards are treated the same as personal credit card rewards for tax purposes. Bonuses earned from referrals or simply for opening an account are taxable, while rewards that require making purchases are not. However, these rewards can affect your business tax deductions. For example, if you buy a business laptop for $1,000 and receive a $20 cash back reward, you can only deduct the net cost of $980 on your business taxes.

Should I Pay My Taxes With a Credit Card?

While you can pay your taxes with a credit card to earn rewards, it is generally not advisable due to the convenience fees charged by payment services. These fees often outweigh the rewards earned. Additionally, putting a large tax bill on your credit card can negatively impact your credit score and accrue interest if not paid off promptly.

However, if you qualify for a credit card with an introductory 0% APR on purchases, it could provide a way to extend your tax payments without incurring interest. Just ensure you pay off the balance before the promotional period ends.

Other options include getting a personal loan or setting up a payment plan with the IRS, which may offer lower interest rates compared to credit card APRs.

The Bottom Line

Using rewards credit cards strategically can offer significant benefits, but it’s crucial to understand the tax implications. Rewards credit cards typically require good to excellent credit, so it’s wise to check your credit report and score before applying.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our experts are ready to assist you in making the best financial decisions.

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