As the digital transaction is increasing day by the system and chances of winning rewards are also increasing dramatically. These rewards also put the confusion to taxpayers’ minds about the taxation system. There is a little insight from the Internal revenue service on the treatment of rewards or cash back earned from the credit cards, these create a lot of ambiguity for a taxpayer receives is subject to the government tax. The most striking question when considering credit card rewards is the kind of rewards received and their association.
Credit card reward
The determining factor is that the ways by which rewards earned are taxable or not. In some cases, the rewards may be in the form of a discount or rebate but not as income. For instance, a reward earned from using your credit card is treated as if it were actually a post-purchase rebate. However, there are some credit card reward programs that offer high signup bonuses which the IRS (internal revenue service) may end up counting as taxable income.
Some key points – The tax on credit card rewards
- Credit card rewards may come under the criteria of income tax.
- In different cases, the rewards are viewed by the revenue department as a discount but may not as earning.
- The cashback earns from referrals and signs up bonuses are usually the most commonly taxable.
- In businesses, the availed discounts may result in a clearly low allowable expenditure deduction.
For business purchases
These are generally different than personal purchases but can provide some deeper insight. If one has a business credit card, a good general rule of thumb is that any rebates on those business products or purchases, deducting the amount that you can reduce from your taxes. This is not the income on the technical ground which is taxable, but the result leads to an increase in the tax burden.
Rewards which are and are not income
- It is very often, the kind of reward received dictates its taxable status. Some of the credit card reward programs never consist of any exchange of cash. Some of the credit card rewards that are covered under this manner include traveling miles, accumulated points for future, purchases, and reward discounts automatically applied as balance credits.
- Sign-up bonuses- It can be possibly a little different. Some signup bonuses for the credit card do not require that you make any purchases or charge any amount to your card. It these signup bonuses are issued directly into cash with no application to your credit card purchases then it can be taxable.
- Cashback reward program considerations may differ as mentioned in the above scenarios. If a cashback reward is transferred directly to your bank account by your choice or by the credit card’s program, then income is considered as a rebate or discount which comes with the benefit of using the credit card If the cash is received the pocket directly, this is mainly a type of discount or rebate, just like for a business, but it is less clearly tracked.
Threshold and limit – The tax on credit card rewards
The threshold for this all criteria is $600 or Rs. 50,000 in a year. In case your reward crosses this threshold then you are taxable for the rewards. Many cashback reward programs give 1% or 2%. With a cashback of 1%, you are required to spend 5 lakhs or $60,000.
If you receive a mail from the income tax department as part of a rewards program, never ignore it. Even if you believe that your income shout qualifies as taxable you are better off taking to an expert for advice. The department has become more stringent on tracking income from these sources.