The Good Tax Guide

Nowadays almost every credit card out there gives you cash back, airline miles, or some other form of rewards. For some people, they may only earn a few dollars a year. Meanwhile big spenders may rake up thousands of dollars annually in cash back. Whether you’re getting $10 or $10,000, is this money taxable?

What Does The IRS Say About Credit Card Rewards?
According to Mike Dolen, editor-in-chief at Credit Card Forum, the rewards are generally not considered income by the IRS (in the United States). Because it’s considered to be a rebate on spending, they presently don’t classify them as taxable income (but check with your accountant to be sure). It’s similar to if you bought a $500 camera which came with a $50 mail in rebate. The $50 you are getting back is not income, since it’s dependent on the $500 you spent. It’s merely a rebate on your spending.

Are Credit Card Rewards Donated To Charity Deductible?
Most credit cards offer you the ability to donate your frequent flyer miles or accumulated cash back to charity. Usually, each card issuer has a handful or charities they work with. The cardmember has the option to choose one of them and donate their rewards. However for the same reason they are not taxable, they also are not deductible. So if you choose to give away your cash back to a certain cause, don’t try and deduct it on your tax return.

So if you want the deduction, what you should do is elect for the cash back which you can deposit into your bank account. If you then turn around and write a check to make a donation, it probably will be deductible. However this particular situation may be a slipper slope, so check with your tax advisor to find out for sure.

Will Credit Card Rewards Ever Be Taxable?
So far the IRS has been fairly vague with their stance on this issue, so it’s within the realm of possibility that they may change their position. If they do change their policy, they are most likely to only apply it to cash back (not the rebates which can only be applied to merchandise and services). So if you have a grocery store rebate credit card, you will probably be safe. For example, the Kroger credit card only gives a rebate that can be used at Kroger grocery stores, so it will probably never be taxable.