The last day to file your taxes is on April 15, and for those who like to wait until the final few weeks of tax season, rounding up documents and preparing to file can come with plenty of questions. For points enthusiasts, there are some extra factors to consider as well.
“Can I cash out my points?” is a common question. We’ve previously discussed options for cashing out your points and whether it’s worth doing in terms of the value you’ll get.
Any discussion on cashing out points leads to a follow-up question: Are there tax implications in doing so? We consulted with a tax specialist to discuss what — if any — tax implications apply to people who decide to cash out their points.
Read on to find out more as you prepare to file your taxes this spring.
Tax implications for cashing out points and miles
Let’s say you spend money on your credit card in bonus categories where you earn extra points, or you earn a welcome bonus on a credit card after spending a certain amount of money across a set period of time. We already know that banks will sometimes send out 1099s for referral bonuses, so what about these credit card rewards? If you opt to cash out the points you’ve earned on a credit card, is that taxable?
When it comes to personal use of rewards earned by making purchases on a credit card, there’s a clearer picture.
“The IRS treats those rewards as discounts or rebates and not as taxable income; so the general rule of thumb, no, not taxable from a personal level,” Jackie Meyer, CPA and founder of tax advisory software TaxPlanIQ, said.
Meyer notes that from a business spending perspective, the matter could become more complicated. This is because the value of credit card rewards could be subtracted from total business expenses.
Even then, Meyer says that she hasn’t seen the IRS go after anyone around the issue. She noted that there isn’t “really any regulation around it.”
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“If someone is getting into the business realm, then it definitely can make it more complex, and the value of those rewards could technically have to be subtracted from total business expenses that are claimed,” Meyer said. “In practicality, have I ever seen someone do that? No. And I haven’t seen a case where the IRS has pursued someone around that either. So it’s a gray area.”
Related: Should you pay your taxes with a credit card?
Meyer’s advice to points and miles enthusiasts is to use their credit card rewards on personal spending to avoid complexities.
“As a business owner and serial entrepreneur myself, I would say I rack up a lot of points personally and through the business, and I try to utilize those points toward personal things so that it doesn’t cross that line of the business nature and turn it into a more complex topic,” Meyer said. “So if you have a choice between using your points toward personal matters versus business, I would lean toward the personal.”
Again, there are times when earning points or miles may have tax implications. This is sometimes the case with referral bonuses, which are rewards accumulated without actually making a purchase. But overall, if you earn your credit card points through purchases and cash them out for personal use, there’s likely no need to claim it on your taxes.
Bottom line
The good news is that the IRS does not have a history of seeing credit card rewards as income. From our understanding — and from consulting with a CPA — most people who cash out their credit card rewards shouldn’t need to claim this on their taxes.
However, if you have questions about tax filing requirements for your particular situation related to points and miles, cashing out your points or anything else, you should seek guidance from your tax preparer or a tax attorney.
