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TPG reader Tina sent me a message on Facebook to ask about taxes:
Fortunately, award travelers shouldn’t have to worry, as the IRS generally doesn’t view points and miles as taxable. The distinction isn’t made based on what form those rewards take or how you receive them — whether it’s cash back deposited into a bank account or miles that get transfered to a frequent flyer program. What matters is what you have to do to earn them in the first place.
Points and miles earned from credit card spending are interpreted as a discount on purchases, much like a store coupon or rebate. Since they’re not seen as income, they don’t incur taxes. The same goes for rewards that offer actual discounts, like the 4th Night Free benefit on the Citi Prestige Card. On the other hand, rewards that don’t involve a transaction are taxable, and should be reported accordingly. For example, the bonuses offered on Citi checking accounts are seen as interest income, and you can expect to receive a 1099-INT form when you earn one.
Another thing to keep in mind is that you don’t really own the points or miles in your loyalty account. The company that runs the loyalty program owns them, so they aren’t your concern when tax time comes around. That argument may not apply to cash back rewards that are deposited into your bank account, but it further illustrates why the IRS has decided not to push for tax revenue from rewards programs.
To answer Tina’s question, cash back rewards shouldn’t be taxed regardless of how they’re deposited, since cash back implies that you earned them from spending. This is a useful rule of thumb, but there may be exceptions. If you’re not sure whether your rewards qualify as income, or if you feel you’re being incorrectly taxed on rewards you’ve earned, you should consult a tax professional.
On the other side of the coin, keep in mind that you can earn rewards for paying taxes. You’ll incur a fee for using a credit card, so it’s not a great strategy for earning rewards at the standard rate. However, it’s an easy way to meet the requirements for sign-up bonuses or spending bonuses.
If you have any other questions, please tweet me @thepointsguy, message me on Facebook or send me an email at info@thepointsguy.com.
Source: thepointsguy.com