Are Credit Card Rewards Taxable?

Benefits Are Not All That They Seem

Many credit cards offer lucrative benefits, bonuses, and rewards to draw potential customers in. However, it is important to be wary of which of these beneficial rewards are taxed and which are not. What initially seems like a large bonus can be reduced heavily through taxation, making it crucial for cardholders to realize which scenarios allow for a lack of taxation.

Income vs Rebate

The IRS, or Internal Revenue Service, classifies credit card rewards in one of two ways. First, if your rewards are counted as income, then this will be perceived as taxable. However, if your rewards are deemed rebate, you will face no additional taxes on these benefits.

First, income bonuses can simply be defined as perks that put money straight into your pocket without any effort on your part. This is often in the form of sign up bonuses. For example, the Amazon Prime Visa Rewards Signature card offers cardholders a $70 Amazon gift card right when they open their account. Since cardholders’ do not have to make a purchase to receive this reward, it is counted as income and is therefore taxable. Some cashback programs also put cash directly into the pockets of cardholders, which also counts as taxable income.

On the other hand, rebates are rewards that require work from the cardholder. Meeting this benchmark can be as simple as offering the signup bonus after the cardholders’ initial purchase. In this way, cardholders can often buy something small with a low cost, such as a pack of gum, and still receive the initial sign up bonus in full.

Bottom Line

Most cardholders will not have to trouble themselves with this information, as many credit cards find ways to avoid their offers being seen as taxable income. 

However, if you are looking to purchase your next credit card, pay close attention to whether or not the bonuses the cards offered have spending thresholds. While they may seem to be a better deal initially, they ultimately will have much lower rewards than anticipated.