The Internal Revenue Service (IRS) follows fairly clear guidelines when it comes to imposing taxes on cash back earned through credit cards. It views any cash back that you earn through spending money as a form of rebate and not as income. However, if you earn cash rewards without spending any money, you’ll need to report what you receive as income.

Cash back received through business credit cards works slightly differently from the taxman’s point of view. In this case, you need to deduct any amount you receive as cash back from the corresponding business expenses.

Taxes on reward points and miles work in the same basic manner.

Are Credit Card Cash Rewards Taxable Income?

The IRS typically views cash rewards that you earn by spending money on your credit card as discounts as opposed to income. For example, if you spend $2,000 on a credit card that offers 2% cash back and earn $40 as cash back, the IRS will look at the $40 as a discount, thereby exempting it from your taxable income.

You might need to pay taxes on credit card cash back in some scenarios. For example, some credit cards come with sign-up offers that provide cash rewards or gift cards without requiring you to spend any money, but simply for opening an account. This is the case with the gift card you may receive if you get a new Amazon Rewards Credit Card. When no purchase is linked to the cash back you get, the IRS views it as income. This is also the case with cash rewards you may receive in the form of a referral bonus.

Do You Have To Declare Cash Back on Your Tax Return?

You don’t have to worry about reporting the cash back you earn by spending money because the IRS looks at it as discounts. However, you need to report all the cash back you earn through non-spending-linked offers on your tax returns.

When it comes to cash back that you earn without having to meet any spending-based criteria, your card provider might send you a Form 1099-MISC: Miscellaneous Income if the value of the cash back you earn is more than $600. If you receive this form, it implies that you need to report the cash back as income on your tax returns. But even if you don’t receive this form, you still need to report any and all of the non-spending-linked cash back you earn, even if the amount is small or below that $600 threshold.

Is Business Cash Back Taxable?

From the taxation point of view, the IRS views cash back earned through business credit cards in the same way as it does with consumer credit cards. If you earn cash back by spending money, it does not count as income.

You might need to pay taxes on credit card cash back if it is not linked to any spending because it would then qualify as income. In addition, the cash back you earn has an effect on the business expenses you report.

If you’ve earned cash back through any business expense, you need to subtract the same from the purchase amount when filing your taxes. For example, if you paid $600 for a business flight and earned $30 as cash back, you need to report the expense as $570.

Are Credit Card Points Taxable?

The IRS views reward points and miles that you earn through a credit card in the same way that it does cash back. As a result, if you earn points or miles after meeting spending-based requirements, you don’t have to report them as income. Points and miles you earn by spending on your card fall under this bracket.

Points and miles you may earn by spending at least a predetermined amount within a given time period are not taxable as well. For example, the 75,000 bonus miles you stand to earn through a credit card by spending at least $3,000 on purchases in the first three months do not qualify as income and are not taxable.

If you receive reward points or miles without needing to spend any money, they qualify as income, and you will need to report their dollar worth in your tax returns. In cases such as these, the onus of deciding their dollar value rests with your credit card provider.

Other Questions You May Have About Cash Back Cards

Learning the answers to some of the commonly asked questions about taxes on credit card rewards and cash back will help you make informed decisions come tax time.

1. Are credit card bonuses taxable?

Credit card bonuses are usually taxable when they are not linked to spending-based requirements. Any bonus that you receive because of spending money is viewed as a rebate by the IRS, and therefore, not taxable.

2. Can you write off credit card points?

Credit card points that you earn by spending money are not taxable and do not have to be mentioned on your tax returns. However, if you earn points without needing to spend any money, you need to estimate their value and include it in your returns.

3. Do you get a 1099 for credit card rewards?

Some credit card issuers provide Form 1099-MISC: Miscellaneous Income to cardholders whose accumulated taxable income from cash back or rewards exceeds $600. Whether or not you receive this form, you need to report the cash back/rewards you earned as income.

Quick Tips

• If you’re looking for a cash back credit card, choose from ones that offer flat cash back rates and others that come with higher cash back of category-based spending depending on your spending patterns

• Retain your credit card statements as documentation of the source of your cash back in case you are ever audited by the IRS. Having a paper trail of the welcome bonus offer and the related spending that earned it will prevent an unwanted tax headache. — Lee Huffman, credit card expert at BaldThoughts.com

Next Steps

Now that you know what type of cash back is taxable, make sure you report the type that you need to on your tax returns. If you don’t have a cash back credit card yet, consider getting one to capitalize on your spending based on factors such as rewards rates, fees, interest rates and added perks.

Related:

• 49 suprising facts about American taxes & taxpayers
• Should you take out a personal loan to pay off credit cards?

This article originally appeared on MoneyGeek.com and was syndicated by MediaFeed.org.

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