As the year draws to a close, and as many consumers start thinking about their taxes, one question asked is whether or not your credit card rewards are taxable.
Earlier in 2012, the issue of taxable credit card rewards was raised when Citi sent out 1099-MISC forms out to certain customers whose rewards values exceeded $600. Does that mean that all credit card rewards are taxable?
Like so many things related to money, and taxes, the answer to that question depends largely on situation.
Windfall vs. Rebate
Whether or not your credit card rewards are taxable depends on whether they are viewed as a windfall or a rebate. Some rewards are seen as windfall income, and are subject to taxes. Other rewards, though, fall under the category of rebate, and are not taxable.
A windfall is a bonus that consumers receive for signing up for the card (or other financial account). When Citi issued the 1099 forms, it was because they had been giving away ThankYou points for card signups. Something similar can be seen when you open a checking account at a bank and you are given an iPad. That prize is considered windfall income, and it is taxable.
Most credit card rewards programs, however, qualify as rebate programs. This is because the rewards are attached to spending money. The rewards you earn because you are spending money on the card are considered rebates for the money you have spent.
One of the ways that some credit card issuers get around the signup bonus issue is by attaching your bonus to spending. If the issuer requires you to spend $1,000 in three months in order to get your $150 signing bonus, then it is actually categorized as a rebate, rather than a windfall.
Reporting Your Windfall Income
Credit card issuers are only required to report what they have paid you if it exceeds $600. So, if the value of the windfall is less than $600, credit card issuers don’t have to report it the IRS. However, that doesn’t let you off the hook.
In reality, you are expected to report your income to the IRS, even if the credit card issuer doesn’t provide a 1099. The IRS expects you to volunteer the information, even if someone else isn’t reporting it.
You report extra income like this on Line 21 of your Form 1040. If you receive a 1099-MISC in connection with your credit card rewards, the amount listed will be on Line 3 of your 1099 form. Most of the time, taxes are not withheld. If they are, you will see the amount withheld on Line 4 of the 1099, and you will have the chance to note taxes already paid on Line 61 on the 1040.
For the most part, you probably don’t have to worry about your credit card rewards being taxed. However, it does make sense to pay attention to the situation, and know whether your rewards are considered rebates or windfalls. The rule of thumb is this: If you have to spend money to receive the bonus or reward, it’s a rebate – and not subject to taxes.