Things To Know About Paying Taxes on Credit Card Reward Points

Do you need to pay taxes for credit card reward points? There is a lot of confusion out there regarding the payment of taxes on frequent flyer miles that earned through credit card reward programs. The taxes on reward points depend on the prior terms and conditions. Taxes are not applicable on every single reward program that is out there. The customer is supposed to report to Intern Revenue Service (also known as IRS) if their reward program happens to be under the umbrella of taxable income. Those who get a huge sign up bonus for a new credit card will have to report their reward points as extra income.

1. Reward Points On Business Credit Cards

Those card holders who are using their cards for business purposes will need to keep a record of everything that they earn through their reward program. Keeping a record for entrepreneurs is mandatory. What this requires is accurately deducting all of the cash backs from the paid amount to minimize the amount that is subtracted from the taxes. If anyone fails to pay the entire payment can cause an increase of extra burdens than the taxable income.

2. Credit Cards Have Different Categories For Taxes

Most of the credit cards available in the market today do not fall in the category of taxes. Their reward programs are tax free, and that makes them extremely popular amongst the masses. Taxes are never imposed on travel points, rebate programs, and credit card signup bonuses. The purchases that are made while using reward points are also exempted from taxes, because they’re earned only after spending money.

We do advise customers to fill in the 1099-MISC tax form if they have the intention of using any amount of money. This tax form is readily available through all the credit card companies, along with the desired bonus.

3. Why Is The Customer Responsible For Reporting To The IRS?

The customers or the card holders are liable to report their taxable reward points to the IRS themselves because the State cannot carry it out all the time. Also, every State in the United States has a different law regarding credit card and reward point taxes. The law is also subjected to change at any given time as well, hence the customer has to be responsible to report and file everything.

Read: Five Common Myths About Selling Airline Miles

4. What Card Holders Need To Know

Customers need to take special care that they do not make any money for reporting their taxes. By law taxable income comes under anything given to the customer where he doesn’t need to make a purchase by spending his or her own money. Gift cards and reward points fall under this category. If anyone still has any doubts regarding this should get in touch with their credit card companies, because they’ll be able to guide you better.

Getting legal advice from a tax professional is highly recommended as well because he’ll be able to clarify anything confusion. As a tax professional he’ll (or she’ll) also be familiar with terms and conditions of different credit card companies and their reward programs.