Tax season can be a headache, and if you’re not relying on an accountant, it’s up to you to go through last year’s finances and figure out what belongs on your tax return. It’s not the most exciting task, and we get it, it’s easy to feel unsure about what’s required, especially when it comes to credit card rewards.
One question that comes up often is whether points and miles need to be reported as taxable income. Unfortunately, there’s no simple yes-or-no answer.
In most cases, the IRS isn’t going to chase you down for forgetting to mention those Chase Ultimate Rewards points or American Airlines AAdvantage miles. But playing it safe is always the better choice. No one wants to go through the hassle of an IRS audit.
So, when do your credit card rewards count as taxable income? And when can you leave them off your tax return? We’re going to cover all of that in the sections ahead.
When to Report Points or Miles on Your Taxes
Whether you need to report points or miles as taxable income depends on how they were earned. The IRS views them as either rebates or awards, and the classification determines if they need to be included in your tax filings. These rules apply equally to cash back rewards.
Rebates: No Tax Reporting Required
Points or miles are considered rebates if they’re tied to a specific transaction, meaning they reduce the cost of a purchase. Rebates are not taxable, so any points or miles earned this way do not need to be reported.
For instance, if your credit card earns 5X miles on travel purchases and you buy a $200 flight, you’d receive 1,000 miles. Since those miles are directly linked to your purchase, they qualify as a rebate and don’t require tax reporting.
Similarly, airline miles from flying and hotel points from booking stays fall into the rebate category. The points or miles are earned as a result of specific purchases, making them exempt from taxation.
Most welcome bonuses that require a spending threshold also qualify as rebates.
For example, if a credit card offers 80,000 points after spending $6,000 in the first three months, those points are treated as a rebate on the required spending.
Even anniversary bonuses can be considered rebates if the credit card has an annual fee. Take the Capital One Venture X Rewards Credit Card, which offers a 10,000-mile anniversary bonus while charging a $395 annual fee. Since the points can be seen as a rebate for paying the fee, they are not taxable.
In general, if points or miles can be clearly connected to a purchase (or a related spending requirement), they are classified as rebates and excluded from taxable income.
Awards: Subject to Tax Reporting
Awards, on the other hand, are points or miles that aren’t tied to a specific purchase. Since these rewards aren’t reducing the cost of anything, they are considered taxable and should be reported as income.
A classic example of an award is a welcome bonus without a spending requirement. Though rare in the credit card world, if a card automatically awards points just for signing up, those points would be treated as taxable income.
Referral bonuses also fall into this category. If someone applies for a credit card using your referral link and you receive points or miles as a reward, those points aren’t connected to a purchase. Therefore, they are considered an award and need to be included in your tax filings.
Banks sometimes offer points for opening a new bank account.
For example, if a bank awards you 50,000 points for opening a checking account and setting up two direct deposits within 90 days, those points would be taxable.
Since they aren’t tied to a specific purchase, they qualify as an award.
Another example is elite status gifts. Loyalty programs occasionally reward high-status members with bonus points or miles. Since these points are given as a benefit of earning elite status, not from making a purchase, they are classified as awards and are considered taxable income.
How to Report Points and Miles on Your Tax Return
If you’ve reviewed your points and miles from the past year and realized that some of them count as taxable income, the next step is figuring out where and how to include them in your tax filing.
When points or miles are considered awards, your credit card issuer might send you a 1099 form. This could be either a 1099-INT if the interest income exceeds $10, or a 1099-MISC if the total income reaches $600 or more. If you receive one of these forms, be sure to include that income in your tax return so the IRS can match the information accurately.
For tax purposes, each credit card point or airline mile is typically valued at 1 cent per point or mile. So, if you’re reporting a 50,000-mile bonus, that would translate to $500 in taxable income.
After identifying which points and miles need to be reported, calculate the total dollar value of your taxable rewards. Then, enter that amount under “Other income” on line 8z of Schedule 1 (Form 1040) when completing your tax return.
Do You Need to Report Business Credit Card Rewards on Your Taxes?
Things get a bit more complicated when dealing with business credit card rewards. While the rules are similar to personal credit cards, there’s one key difference. When reporting business expenses, you’re expected to account for any rebates, including points or miles earned through those purchases.
Just like with personal cards, most points or miles earned from business credit cards aren’t considered taxable income. But if those rewards weren’t earned directly from a purchase, they don’t count as a rebate and can be considered taxable.
Here’s where it gets tricky. When reporting business expenses, you should report the net amount after factoring in any rebates.
For instance, if you buy a $200 flight as a business expense and your business credit card offers 5X points on flights, you’d earn 1,000 points. Since credit card points are valued at 1 cent each for tax purposes, those 1,000 points are worth $10.
When reporting the flight, you’re supposed to record it as a $190 expense, reflecting the $200 cost minus the $10 rebate from the points.
Now, the odds of the IRS coming after you for not deducting the value of points earned on business expenses are pretty low. But if you want to make sure your tax return is 100% accurate, it’s best to subtract the value of any rebates (including points and miles) from your business expenses.
Do You Really Need to Report Credit Card Points and Miles?
Right now, the IRS isn’t actively going after taxpayers for failing to report points and miles. Tracking how these rewards are earned and redeemed isn’t a high priority, mainly because it’s too complex to enforce. Because of this, the risk of facing any penalties for not reporting them is extremely low.
That being said, some types of points and miles are considered taxable income and should be reported. These include rewards that aren’t tied to a specific purchase or group of purchases, such as referral bonuses, welcome bonuses that don’t require spending, elite status gifts, and similar awards.
On the flip side, most points and miles earned through spending are not taxable. This includes rewards like points earned from regular purchases, welcome bonuses with a spending requirement, and anniversary bonuses for credit cards with annual fees.
Given how the IRS currently views credit card rewards, the general rule is simple: only report your points and miles if you receive a 1099 form. If no form shows up, there’s no need to worry about including them in your tax return.
