It’s that time of year again – tax season! If you’re like most Americans, you probably have a lot of paperwork to complete, not to mention trying to stay on top of your finances. In this article, we’ll be discussing one of the more complex areas of taxation – credit card rewards.
What is a Credit Card Rewards Program?
A credit card rewards program is a great way to get extra benefits like cash back, travel discounts, or points that can be used to buy things you normally would not be able to afford. However, some of these benefits may be taxable.
For example, if you earn points on your credit card and use them to purchase items that are worth more than their purchase price, the points may be considered taxable income. This means that you may have to report the points as taxable income on your tax return.
Likewise, any travel discounts or other special privileges that come with a credit card rewards program may also be taxable. For example, if you receive a 10% discount off your entire purchase when you use your card for shopping at a particular store, the discount would likely be taxable.
The Types of Credit Card Rewards Programs
If you’re like most people, you probably have a few credit cards that offer rewards programs. But are your rewards taxable? Here’s a look at the different types of credit card rewards programs and their tax implications.
Cash back rewards: This type of program pays you a percentage of the purchase price of the items you buy with your card, typically as cash back. The IRS generally considers these rewards to be taxable income. For example, if you earn $100 in cash back from a card with a 1% cash back rate, your $10 in rewards would be considered taxable income.
Points and miles: This type of program gives you points or miles for every dollar you spend on your card. You can then use those points or miles to redeem prizes, such as travel opportunities or gift cards. The IRS generally considers these rewards to be non-taxable income. That means that even if your points or miles are worth less than the taxes you would have paid on the original purchase, the IRS still won’t charge you any taxes on them.
However, there are a few exceptions to this rule. If your points or miles are “gift cards,” then the
When Are Credit Card Rewards Taxable?
When you redeem rewards points for goods and services, the redemption is considered a taxable event. This means that the rewards points are treated as cash, and you must report the value of the rewards points as income on your tax return.
Calculating the Taxable Value of Your Rewards
If you’re considering redeeming your rewards for cash or goods, you may want to know if the value of the rewards is taxable. Here’s how to calculate the taxable value of your rewards:
1. Determine your annual income. This is the total amount of money you earn each year after subtracting any taxes that may have been withheld from your paycheck.
2. Add up all of your rewards-earning transactions during the year. This includes both physical rewards like gift cards and store credit that you use, as well as digital rewards like points earned through apps or websites.
3. Compare the total amount of rewards earned with the annual limit on tax-free deductions that applies to individual taxpayers ($24,000 for 2018). If the total value of rewards earned is below the annual limit, then none of the rewards are considered taxable income. However, if the total value of rewards earned exceeds the annual limit, some or all of those rewards may be taxable income.
4. Figure out which portion of the total value of rewards is above the annual limit and assign a tax rate to it. For example, if someone earns $2,000 in rewards
Conclusion
Did you know that your credit card rewards can be taxed as income? This is true if you meet the IRS definition of a “qualified dividend.” Qualified dividends are payments made by a corporation to its shareholders after the shareholder has met certain investment requirements, such as holding the share for at least 60 days and having owned it for at least one year. Rewards earned through purchases on your credit card, like miles or points, are considered taxable income.
If you’re not sure whether your rewards are taxable, speak with an accountant or tax specialist who can help you determine whether any of your rewards qualify as a qualified dividend. In addition to taxes, taking these types of rewards could also reduce your available funds for other purposes, so it’s important to weigh the pros and cons before making any decisions.