Perhaps you took advantage of those enticing credit card offers that include cash back rewards that showed up in the mail or maybe you are considering taking them, but don’t know if the rewards have to be included in your taxable income.
For the most part, the IRS treats credit card cash rewards as discounts rather than taxable income since you are not getting the cash in exchange for anything. The cash rewards are an incentive to purchase something.
Are There Any Cases Where Credit Card Rewards Would be Taxable?
In the case of large sign up bonuses on credit cards, the IRS may require you to report your rewards as income. In this case the credit card issuer would add a disclosure to the credit card agreement that your rewards may be reported to the IRS if you get over a certain dollar amount in rewards. If they are reported to the IRS, you would receive a form 1099-Misc and would need to report the rewards as income. Large travel rewards could also be reported to the IRS, but the credit card issuer would disclose whether or not your rewards would be reported.
If you received a credit card rebate or reward on a business purchase, it’s important to remember that the rebate or reward will have to be deducted from the cost of the product before you take the deduction. Sorry you can’t receive a rebate or reward and deduct the entire purchase price. For instance, if you are self-employed and purchase a $200 phone and get a $50 rebate, you can’t deduct the entire $200. You need to reduce the tax deductible amount to $150.
Cash Back Rewards Versus Prizes
It’s important to remember, that a cash back reward for a purchase and a taxable award or prize are very different. Taxable awards or prizes are taxable as income so if you were lucky enough to win a $25,000 cash prize in a drawing for new cell phone customers you won’t be able to escape claiming the prize as income since it can’t be treated as a discount.
Don’t worry about knowing these rules. TurboTax will ask simple questions related to you and let you know what income is taxable and what is not.