Many people often use credit cards for the rewards they
offer. People could receive free
flights, cash back, or other gift cards, but could you actually be increasing
your tax liability?
We hope that you are paying off your credit card each month and
not incurring additional debt while achieving those rewards, but either way you
should be aware of the rules.
Tax-wise, it's okay to reward yourself by taking advantage of your
credit card's cash-back program. At present, the amount you receive or use to
reduce your payment or balance is not taxable income to you. Instead, it's considered
a rebate, or a reduction in the price of the items you purchased, much like
coupons you use at the grocery store.
The same is true for airline miles, gas rewards, or points you
earn for charging purchases on your credit card.
What about amounts you receive as an incentive to sign up for a
credit card? Those might be taxable, depending on the circumstance. For
instance, if all you need to do to get the incentive is open an account, it's
likely to be taxable, even if you do not receive a tax-reporting form.
On the other hand, when you're required to charge a certain amount
before you receive the promised incentive, it may be deemed a rebate, and be
nontaxable to you.
We understand that these scenarios can be quite confusing and
encourage you to talk to a Liberty Tax specialist to make sure your situation
is properly covered.
When you already have an account and win a prize in a random drawing
sponsored by the card company, that's income, just like other contest winnings.
If you have questions about your specific situations, please don’t
hesitate to contact us. We are here to
help and look forward to assisting you.
Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.