Travel Rewards and Tax Returns: 3 Things You Should Know

AN IMPORTANT NOTE: We are not the IRS or legal advisors. When considering how to handle travel rewards and tax returns please only use the flowing as a guideline and be sure to be up to date on current tax laws and requirements. TurboTax is a great resource for this.

If you have perused this site (even a little) you are likely thinking about travel rewards, regularly. How to earn them, the best way to spend them, which cards are the best for both. If they have not already, travel points and rewards will become an integral part of your spending habits. These points, often accrued through credit cards, airline programs, hotel loyalty schemes, and other promotional offers, can significantly lower travel costs, provide upgrades, and offer various other benefits.

However, as these points can sometimes translate into substantial financial value (and as we are firmly in the midst of tax season), an as-important question arises: How should you handle your travel rewards and tax returns? Or, in other words – do travel rewards need to be claimed on your tax returns? This article explores the intersection of travel points and tax refunds to clarify this aspect.

Understanding Travel Points

You have, no doubt, at least heard of travel rewards at this point. If not, a brief recap – travel points or rewards are incentives provided by credit card companies, airlines, hotels, and other businesses to encourage loyalty and continued patronage. Customers earn these points based on the amount they spend or through specific promotions. Once accumulated, points can be redeemed for flights, hotel stays, car rentals, and other travel-related expenses. In some cases, points can also be converted to cash, gift cards, or merchandise. We have multiple articles on the benefits of travel awards, how to earn them and how best to spend them, so I would highly suggest becoming acquainted if not already.

Travel Rewards and Tax Returns: Tax Implications

The tax treatment of travel points is a nuanced subject, primarily because it depends on how these points were acquired. Generally, the Internal Revenue Service (IRS) in the United States does not consider travel points or rewards as taxable income if they are earned from spending or business loyalty programs. This exemption is mainly because these points are viewed as discounts or rebates on purchases rather than income.

However, there are exceptions. For instance, if travel points are provided as a reward for opening a financial account or as part of a promotional offer without the requirement of spending, the IRS might consider the points as taxable income. The rationale is that these points can be seen as a gift or reward for a non-purchase activity, thereby constituting a form of income that could be subject to taxes.

Travel Rewards and Tax Returns: Reporting

For the majority of people who earn travel points through spending on credit cards, flying with specific airlines, or staying at particular hotels, there is no need to worry about reporting these points on their tax return. These rewards are considered a form of rebate on spending, not taxable income.

However, if you receive a significant bonus for an action unrelated to a purchase, such as signing up for a bank account, it’s essential to review if this needs to be reported. The financial institution or company providing the points should issue a Form 1099-INT or 1099-MISC if the value of the rewards is considered taxable income. It’s crucial to include this information in your tax return to avoid any potential issues with the IRS.

Travel Rewards and Tax Returns: Conclusion

In conclusion, travel points typically do not need to be claimed on tax returns if they are obtained through purchases or as part of a loyalty program. The IRS views these points as discounts or rebates, not as income. However, points received through non-purchase related promotions may have different tax implications and could be considered taxable income. It’s always a good idea to consult with a tax professional or refer to IRS guidelines to ensure compliance and avoid any tax-related issues. Understanding the nuances of how travel points relate to taxes can help travelers make the most of their rewards without facing unexpected tax liabilities.