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Are Credit Card Rewards Taxable?

Lots of our Free Money [1] deals focus on sign-up bonuses or cash back rewards [2] for credit cards.

With tax season in full force, I asked Madison recently if sign up bonuses and credit card rewards are taxable. It’s sometimes surprising to see what counts as taxable income [3].

Thankfully, the tax rules for credit card rewards are a little easier to understand than Lending Club taxes [4]!

Taxable Sign Up Bonuses

Sign-up bonuses are taxable as ordinary income. This is true for bank accounts such as ING [5] and credit cards such as the Discover More [6] or others. Sign-up rewards for sites like Lending Club [7] are also taxable.

Some financial institutions will report sign up bonuses to you and the IRS as interest on a 1099-INT [8]. Whether or not you receive a 1099-INT, you still have to report this income, no matter how small the amount.

Nontaxable Cash Back Credit Card Rewards

In contrast, you do not [9] have to report or pay taxes on cash back rewards for using credit or debit cards. The IRS issued [10] a private letter ruling [11] on this in 2002. While private letter rulings are not actually binding for the general public, there’s little reason to believe the IRS would treat anyone else differently without issuing guidelines.

For now, rewards are basically treated as rebates. Since you already pay tax on the income you use to make the original purchase, you don’t have to pay again when you retain 1 – 5% [12] on the purchase.

How to Report Sign-Up Bonuses

If you received sign-up bonuses in 2010, you will have to report them as interest income. You do this on form 1040 [13], 1040A [14], or 1040EZ [15]. If your total interest income exceeds $1500 you will have to use Schedule B and the form 1040 or 1040A.