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Do you have to pay taxes on credit card rewards?

In some cases, rewards earned on credit cards should be reported

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Millions of Americans are busy working on their 2020 federal income tax return, hoping for a nice refund. If you signed up for a rewards credit card last year, you may have some easy-to-overlook income that needs to be reported.

In most cases, the rewards you earn on your credit card are not taxable income, but in a few cases they are. The cashback you get through the normal use of your credit card is not taxable. The Internal Revenue Service (IRS) considers that a rebate -- a discount on the price you paid.

But sometimes credit card companies give new account holders some points upfront just for opening a new account. Since you didn’t have to spend any money to receive those points, the experts at CardRatings.com say that is income that should be reported.

Alternatively, you might not be getting a refund -- maybe you owe the government some money. What about paying your taxes with a rewards credit card? Is that ever a good idea? The experts at CardRatings say it can be, though the practice has pros and cons.

On one hand, paying a hefty tax bill with a cashback credit card can earn a nice reward, but there can be a downside. Industry specialists say the payment to the IRS can carry fees that could easily offset any rewards you might gain.

Look out for transaction fees

"Paying taxes with a credit card will incur a transaction fee and in 2021 that fee ranges from 1.96 to 1.99 percent of the amount paid, depending on the service that is used," said Brooklyn Lowery, CardRatings' senior managing editor and credit card expert. "Paying that fee to earn just 1 percent back likely isn't wise, but paying the bill and earning a good-sized signup bonus that will be worth more than the fee when redeeming the rewards is perhaps worth considering."

Using the right credit card to pay the IRS is a key consideration. For example, if you’ve just signed up for the Chase Sapphire Preferred card, you need to spend $4,000 in the first three months in order to qualify for the sign-up bonus. A large tax bill could help you get there under the deadline.

If the Discover It Cash Back card is a new addition to your wallet, keep in mind that Discover matches all the cash-back earned during the first year as a cardholder. Again, a significant tax bill could generate substantial cashback that will be matched at the end of the first year.

If you have a Capital One Venture Rewards card, it may also be a good choice for paying taxes. The card gives account holders two miles for every $1 spent on all purchases, meaning at least 2 percent back on the tax bill. If you’re a new customer, you can earn a welcome bonus by spending $3,000 in the first three months the account is open.

Using the right credit card could make paying taxes a little less painful and a little more rewarding.

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