You don't need to pay taxes on these credit card rewards

Have you ever wondered if you had to pay taxes on credit card rewards like cash back or frequent flyer miles? Here's your answer, as well as some exceptions to be aware of.

The IRS (Internal Revenue Service) has clearly stated that rewards are different from income. It said that rewards are given after spending money, instead of being earned through investment or work. Since they're considered two different things, it makes sense that they work under other rules.

If you consider credit card rewards according to what the IRS considers an actual reward that won't be taxed, some fall out of this category. For instance, referral bonuses could be thought of as income. In opposition to cash back or frequent flyer miles, you don't receive a referral bonus for purchasing something through a direct transaction that's worth more than the bonus.

Let's say you receive some money to open a credit card or a bank account. You could receive different forms: the 1099-INT or the 1099-MISC. The first one is given if the interest that the customer earns is worth $10 or more (in a year). The second form usually belongs to situations when the lender gives anything in value over $600, even though it can be sent if the amount is lower.

These rules belong to business credit cards as well. However, they also include some specifics that should be pointed out. You can still enjoy the card's rewards without being taxed on them, but you'll have to pay close attention to tax deductions.

If you're offered a 2.5% cashback on a purchase made by one of these business credit cards, you can consider this amount as a reward and not an income and not pay any taxes on it. But this comes with a catch: you can't ask for a tax deduction on the total amount paid, as only 97.5% of it is income and the rest 2.5% is a reward.

You also need to consider that you can't ask for any tax deductions if you donate your rewards. You can still give away your frequent flyer miles and cash back, but the IRS won't see them as a legitimate deduction.

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