Credit card issuers are paying out more and more in rewards every year. American Express, Discover and Capital One spent a combined $12.9 billion on reward payments in 2017, a 59% increase from 2011.
And while you may have your rewards credit card to thank for free airfare or a complimentary hotel night stay in 2019, some of those perks might actually cost you extra when you pay your taxes.
Now that the daunting tax season is officially upon us, that means gathering all your necessary documents — and perhaps paying Uncle Sam money on the credit card rewards you earned.
The types of rewards you earned and how you receive them determines whether they are deemed taxable by the IRS. To understand these tax requirements, CNBC Select took a look at the different reward categories credit cards offer.
Generally, the IRS categorizes redemption of credit card rewards and frequent flyer miles as non-taxable.
Instead of being seen as income, "they are treated as rebates or discounts on what you purchased," Steven Rossman, CPA and shareholder at accounting firm Drucker & Scaccetti, tells CNBC Select.
If you earned $200 cash back after you spent $500 on purchases in your first three months from opening a Chase Freedom® account, or if you earned 2% cash back on purchases you made in 2019 with the Citi® Double Cash Card, none of those rewards are taxable because you were required to spend money to receive them.
The same applies for the points you earn throughout the year on travel rewards credit cards, like earning 3X points on flights, hotels, homestays and car rentals with the Wells Fargo Propel American Express® Card. You would not owe tax on any of those points.
Most credit card rewards are earned once you actually start using the card. There are only a few cards that award a welcome bonus automatically after account approval with no spending required.
If you didn't have to charge purchases on your card in order to receive the welcome bonus, the value of that reward is considered taxable income. For example, you opened a new Amazon Prime Rewards Visa Signature Card account and received a $70 Amazon.com gift card.
"The only time that credit card rewards are taxable is when you do nothing in exchange for the reward, i.e. you get 60,000 miles for signing up for a credit card, with no minimum spending," Rossman says.
For those sign-up bonuses that don't require any purchases to be made, or a certain spending requirement to be met within a specified time, you might be sent a Form 1099-INT (required if interest income is $10 or more) or a Form 1099-MISC (required if income is $600 or more) from your credit card company for the value of the reward.
"If a 1099 is issued, the recipient should report the income on her/his tax return, so that the IRS can match the income to the recipient's tax return," Rossman says. "Even if no 1099 form is issued, you still have to report all income, including qualifying rewards bonuses, if taxable."
Most credit card rewards are not taxable, but be wary of those that don't have a spending threshold required in order to redeem rewards. Although these cards offer an upfront incentive, you will be required to report those rewards as income later when you file your taxes.
The IRS began accepting 2019 tax returns on Jan. 27, and you have until April 15 to submit your return. Make sure you submit all necessary documentation, including any forms from your credit card company, if your rewards qualify as taxable.
Information about the Chase Freedom® has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.