Credit Card Reward Points and Airline Miles are NOT Always TaxableNovember 07, 2014
Could your cash back or airline miles be considered income?
The law requires you to report and pay taxes from all sources and types of income such as lottery winnings, awards, and sweepstakes just to name a few. Could those hard-earned cash back or airline miles on your wisely planned purchases be considered income? Let’s take a closer look at the taxability of credit card reward points and airline miles.
Credit Card Rewards. The IRS either considers them a ‘rebate’ or an ‘award’. So what is the difference?
- Rebate: To the extent the reward is a result of some kind of financial transaction that is tied to spending, such as purchases, the rewards are treated as non-taxable rebate i.e. a discount on the purchase rather than addition to income or wealth. The rebates could include cash back, miles or points towards merchandise.
- Award: If no financial transaction is needed to get the reward except for ‘signing up’- than yes, it is a taxable award.
The exception to the above statement is that the rebate or the discount reduces the cost of tax deductible expense. For example, if you are a small business owner using the cashback credit card to pay for inventory or other business related expenses, you will have to reduce the purchase price for the amount of cashback received.
Airline Miles. In 2002 the IRS made an announcement about taxation of frequent flier miles earned through business travel stating that due to numerous technological and administrative issues relating to these benefits, they have not provided an official guidance on matters related to the timing and valuation of income inclusions. Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent fliers miles.
- The good news is that the frequent flier airline miles that you collected with the credit card purchases and travel are tax free.
- However when the miles are converted to a cash reward or benefit, or are accepted as a bonus or award for ‘signing up’ or ‘opening an account’, they would be considered taxable income. You might even be issued a Form 1099-Misc reporting the award.
If you have questions about your credit card rewards or if you collected rebates or rewards and are wondering if this will affect your taxes this year please contact Parul Bansal, CPA or any member of our Tax Services Group.