The tax season is officially here. So as you gather your tax-related documents, you may ask yourself, “are debit card rewards taxable?”
You can earn various rewards through debit cards, including sign-up bonuses, cash back, referral bonuses, and other perks. These rewards can result in anywhere from hundreds to thousands of dollars a year. If you’re wondering whether debit card rewards count as taxable income, the short answer is no. However, there are exceptions.
Keep reading to learn what the Internal Revenue Service (IRS) says about debit card rewards, when they’re taxable, and when they’re not.
What are Debit Card Rewards?
Debit card rewards are typical payment cards that deduct money directly from your checking account when you use it. However, it comes with many perks, such as cash back, sign-up bonuses, points, or referral bonuses.
Rewards debit cards have different reward structures, which can vary in terms of how you can redeem your rewards and what you can redeem them for. Typically, you can redeem your rewards for gift cards, statement credits, checks, merchandise, or other perks.
Debit cards with rewards are difficult to find, but they exist.
How Do Debit Card Rewards Work?
When you use a rewards debit card to make a purchase, the amount is automatically deducted from your linked checking account. However, the amount you can spend is limited to what’s available in your bank account and will fluctuate along with your account balance.
Debit card rewards work as a combination of credit cards and ATM cards. You can use them to withdraw funds from automated teller machines or make payments for purchases. Debit card purchases can be made with or without a PIN.
It’s important to note that debit card rewards have daily purchase limits, meaning you can’t spend more than a specific amount within a 24-hour period. But this can vary depending on your financial institution.
The amount of rewards you’ll earn when you use your debit card can differ based on the reward program and your bank.
Are Debit Card Rewards Taxable?
In most cases, debit card rewards, such as points, cash back, and miles, are not taxable. However, they may be taxable in some situations, depending on how you earned the rewards.
If the debit card requires you to meet a specific spending requirement to earn the reward, then such perks are not taxable. For instance, if you receive a $200 cash back for spending $1,000 within three months of account opening, you don’t have to report the $200 in your annual tax returns.
Things are different if you don’t need to do anything to earn the reward. For example, if you simply earn $200 back after getting approved for a new debit card, the amount is considered income and taxable.
What Does the IRS Say About Debit Card Rewards?
The IRS views debit card rewards as discounts rather than income, which are not taxable. This is because you must complete a particular action to earn the reward 一 spend a certain amount within a few months of account opening or make purchases using your card. Since discounts aren’t taxable, you don’t have to track all your rewards to file your tax returns.
If you’re unsure if the rewards are taxable, consider speaking to a tax professional.
When Debit Card Rewards are Taxable
If you earn rewards without spending your own money, chances are these perks are taxable. Here are situations when debit card rewards are taxable.
Many banks offer incentives for signing up for a new account. The welcome offer is typically in the form of cash deposited into your bank account, reward points, or miles.
For example, if you sign up for a new debit card with a $500 welcome bonus, the amount is taxable. According to the IRS, you didn’t earn the cash bonus, so it’s taxable income.
But if you open a debit card that offers 10,000 points for meeting a spending threshold of $1,000 within the first three months of opening the account, you won’t have to report the reward as income. This is because you spent your own money to get the sign-up bonus.
The same goes for referral bonuses. If you refer other people to open an account at a specific bank or credit union and they get approved, you’ll earn a referral bonus, which is taxable.
Essentially, you’re helping the financial institution get a new customer, so the commission issued in exchange for your service is taxable income.
If you receive a bonus or reward that you didn’t earn, you may receive a 1099 miscellaneous income tax form from the issuing company. The form contains a summary of the income outside regular wages. The IRS requires you to file a 1099-MISC form when the income is $600 or more.
It’s important to note that you must still report all the qualifying taxable income even if you don’t receive a 19099 form.
When Debit Card Rewards are Not Taxable
Not all debit card rewards are considered income by the IRS, meaning they’re not taxable. Such perks include:
Points Earned with Purchases
Most debit cards offer reward points when you use the card to make purchases. You can redeem the rewards for gift cards, travel reservations, or statement credits. Provided that you’ve spent money to earn the rewards, points earned with purchases aren’t taxable.
Some debit cards may offer airline miles to help you save on travel. If you’re a heavy spender, you can quickly accumulate thousands of miles for your next vacation trip. Again, how you earned the miles determines whether the miles are taxable or not. If you spent your money to earn the miles, you don’t need to report this to the IRS.
Another popular reward most debit cards offer is cashback. You can earn rewards on everyday purchases, such as groceries, gas, and restaurants. Like other rewards debit cards, if you have to spend money to earn cashback or meet certain spending thresholds to get a bonus, your earnings are considered rebates, which are not taxable income.