Credit Card Rewards Aren't Taxable -- If You 'Earn' Them

Claire Tsosie

The Internal Revenue Service wants to know all when it comes to your income, your investments and even your bitcoin earnings, but there's one thing it doesn't seem to give a fig about: How many points or miles you've earned on your credit card.

"Generally, individuals aren't taxed on credit card rewards, because they're considered a rebate," says Laurie Ziegler, secretary and treasurer of the National Association of Enrolled Agents, an organization of tax experts. For individual taxpayers, even a big credit card sign-up bonus is considered a rebate if it's "earned" by meeting a certain requirement.

But "when there's not a requirement of a purchase, [rewards are] taxable," Ziegler adds.

In particular, the IRS does enforce taxation on bank rewards when your bank reports them to the IRS as a cash value and issues you a 1099 form, as some banks do for certain types of bank account sign-up bonuses.

Rewards and Taxes

In 2012, Citi sent 1099-MISCs to some customers who had earned frequent flier sign-up bonuses for opening bank accounts, whether they had been redeemed or not -- perhaps in an overly cautious attempt to comply with tax law changes. But because the IRS has never pursued an enforcement policy on the taxation of such rewards, the move confused consumers, many of whom weren't expecting the 1099s. Citi had valued the American Airlines miles in cash at 2.5 cents each, causing some customers to owe hundreds of dollars. (NerdWallet values the same points at 1.2 cents each.) And those who ignored the 1099s risked an audit from the IRS.

In 2014, the U.S. Tax Court held that a petitioner who had received a 1099-MISC for a bank account sign-up bonus in 2009 still had to report as income bonuses earned when opening the account. The 1099 form, issued by Citibank, valued the 50,000 ThankYou point bonus at $668, the value of the airline ticket the petitioner got upon redeeming the points.

But Citi clarifies that this tax reporting applies only to awards earned for opening bank accounts, not credit card rewards.

"When a customer receives a gift for opening a bank account -- whether cash, a toaster or airline miles -- the value of that gift is generally treated as income and subject to tax reporting," a Citi spokesperson said in a statement. "This is separate and distinct from miles or points earned by our credit card customers for their purchases."

After Citi began issuing 1099s for these bonuses, Bank of America added disclosures about 1099s to its credit card terms and conditions, making some consumers wonder whether they might be getting tax forms on those too. But so far, there haven't been any reports of this happening. Bank of America declined to comment further on the disclosure.

Pay attention to your 1099s

In many cases, you won't receive a 1099 for sign-up bonus rewards. Because most bonuses are less than $600, the minimum threshold needed to generate a 1099-MISC, many banks never have to consider whether points and miles are taxable.

"I think it is pretty rare," Ziegler says.

If you do get a 1099 for rewards, it's probably because you received a bank account bonus without making a purchase. And as the IRS points out, taxable amounts under $600 should also be included in your income, even if you don't receive a 1099.

An IRS spokesman cited guidance issued in 2002, saying that the agency has "not pursued a tax enforcement program with respect to promotional benefits such as frequent flier miles," declining to comment further. On the tax agency's 2015 list of taxable and nontaxable income, "credit card rewards" weren't mentioned at all.

So what is taxable? It's hard to say. But if you get a 1099 from your bank for rewards, don't ignore it, regardless of how you earned your rewards.

"If they did receive a 1099, they'd have to list it when they do their tax return, so there's not a mismatch with the IRS," Ziegler says. "But if it's not taxable, they could deduct it as a rebate."

If you needed to make purchases to earn the rewards, the bonus can likely be taken as a rebate. Asking a tax professional for guidance in this situation could be a good idea, Ziegler adds.

Credit Card Rewards Still Aren't Taxable, in Most Cases

Until the IRS releases further guidance about credit card rewards, it's safe to say that you don't have to worry about paying taxes on them unless you receive a 1099. If the IRS wanted to tax rewards generally, it would have to determine the value of dozens of rewards currencies and redemption styles. For instance, the same mile might be worth 5 cents when redeemed for a certain flight, 0.5 cents when redeemed for cash back or nothing if it expired before it was used. And so far, there's no sign that the IRS is developing a system for valuing points and miles.

This lack of guidance makes it harder for banks to stay in compliance with tax law -- but it's ultimately a good thing for consumers. It means that even if you've earned thousands in credit card bonuses, you probably won't owe Uncle Sam a penny more than you'd normally pay.