This post comes from Holly Johnson at Partner site GetRichSlowly.org
Over the past 12 months, I have used credit card rewards to finance the bulk of our trips to Jamaica, Las Vegas, Denver, New Orleans, London, Paris and St. Maarten. And in the process, I’ve also cashed in a five-figure sum of hotel loyalty points, airline miles and cash-back rewards. Of course, I blame part of this on my love of family travel, but it also has to do with how I make a living. Because I’m a points-and-miles blogger for Frugal Travel Guy, it would be pretty weird if I never went anywhere.
Aside from the questions I hear about earning points and miles and booking award travel, I get a lot of questions on the financial aspects of these trips. Are credit card rewards counted as taxable income? How about bank bonuses? If the fine print isn’t all that specific, how can I tell?
Are bank bonuses taxable?
We’ve all gotten at least one of these offers in the mail. They say something like, “Open a new savings account with XY Bank and receive a $300 bonus after setting up direct deposit” or “Earn a $250 bonus after making 10 qualifying transactions with your bank debit card.”
Without a doubt, bank bonuses are counted as taxable income that you must claim. In fact, the bank you earn a bonus from is expected to send you a Form 1099 for the bonus amount. Is it a pain? Yes, but at least you know up front that you will be taxed on any bonus dollars you earn in a regular or business checking account or savings account. And those dollars are still free money, right?
Are credit card rewards taxable?
Meanwhile, credit card rewards are an entirely different animal and, thus, different rules come into play. Part of the reason credit card rewards are viewed differently by the IRS is because they are generally doled out in the form of travel currency. And just because you “earn” hotel loyalty points or airline miles doesn’t mean you will use them. So why should you pay taxes on a reward that you may or may not use, or might use next year?
Another reason: The IRS tends to view credit card rewards as a rebate or discount, not as a bonus. For example, some rewards offers will give you 50,000 airline miles after you spend $3,000 on your rewards card within 90 days, and others dole out 2 percent cash back on all of your everyday purchases. But you have to spend your own money to earn the rewards, which apparently puts credit card rewards in a different category in the eyes of the IRS.