Tax Savings On Credit Card Points
Over 60% of people prefer to use credit cards as their primary payment method. With cashback/rewards getting as high as 6% today, credit card rewards can result in some significant bucks, especially if you have expensive purchases.
Disclaimer: there is a lot of ambiguity for you as a taxpayer in this area, and this post (or any post on our site) is not meant as legal advice; you should discuss your specific scenario with your tax preparer. Read here about an ongoing IRS investigation on American Express.
In some cases, the cashback may be viewed as a rebate, not as income. For example, a cashback program for using your credit card is treated as if it were a post-purchase rebate. However, there are some credit card cashback programs that offer large sign-up bonuses, which the IRS may end up counting as taxable income.
In reality, it's not technically boosting your taxable income, but the net result does increase your tax balance.
Let’s take some examples; while there might be more types of rewards, those are the most widely used.
- Frequent Flyer Miles/Points (FFP)
- Hotel Points
- Credit Card Points
- Cash Back rewards
- Cash rebates
- Sign-Up Bonus
Hotel Points, Frequent Flyer Miles, and Other Credit Card Point Rewards
The good news is, those items are not taxable.
One thing to take into consideration, when you redeem your points for business use, you are not getting the cash equivalent as a business deduction. Rather than using the rewards for business use, pay for those business expenses regularly, get the deductions, and use the points for personal expenses!
For example, let’s say you have 1,000,000 credit card points which is a value of $10,000. If you redeem those for an airline ticket for a business trip, you cannot pick up the $10,000 travel expenses. It's rather worthwhile for you to pay the $10,000 out of pocket, get the business deduction, and take advantage of redeeming the points for your family vacation trip.
Cash-Back Rewards and Rebates
Cash back rewards and rebates are not considered taxable income, but it reduces your original expense (only applicable for business).
For example, if you purchased $5,500 in equipment with your credit card and get back a 5% rebate for a total of $275, the rebate will reduce your original expense, and you may only claim a $5,225 tax deduction.
For your advantage, if you have an option between points or cash-back, rather open a credit card with points so you can use the full expense as a tax deduction, and you won’t pay tax on the points.
There are two types of Sign-Up bonuses
- Spending Requirement
- No Spending Requirement
Spending Requirement: If you have a spending requirement in order to get the sign-up bonus, you will not be paying tax on it. The IRS treats it as a rebate which is not taxable.
No Spending Requirement: If you are getting a sign-up bonus just for opening an account or for referring someone, then this would be taxable. If you are getting miles or any non-cash bonus, then you will pay taxes on the cash equivalent.
Can I donate Credit Card Rewards to Charity?
Here is a cool tax planning tip. You can donate your credit card cash rewards to charity (such as Miles for Life), receive a charitable deduction, and you won't pay taxes on it.
- Generally, credit card points, cash back, or rewards are not taxable.
- Personal use of points earned on a business credit card is not taxable.
- Avoid using points for business travel. Instead, pay for those, get the tax deduction, and then utilize any points earned for personal travel (where you would not traditionally get a tax deduction either way).
- Cash back or cash rewards are not taxable, but if you are redeeming them in a business, they do offset the initial expense you took.
- Sign-up bonuses are not taxable if there is a spending requirement, but if you get them just for signing up and nothing else, they are likely taxable.
- Referral bonuses will typically be taxable.
- You can donate cash-back rewards to charity and still get a charitable deduction.