I was recently traveling for work and when flying back from Las Vegas, the pilot came on over the microphone and promoted a Spirit Airlines MasterCard. “5,000 frequent flyer miles just to apply!” he yelled, “If approved an additional 10,000 miles and for every dollar spent, one mile to add to your account, that’s at least three free trips folks!” A good amount of people on the plane applied, I did not. However the accountant in me sat there and wondered, what is the impact on your taxes and how do you account for frequent flyer miles or cash rewards?

Every year the Federal Government debates whether these perks are taxable. Just think all those free miles – there has to be a catch, right? I mean, when I signed up for my credit card I got $100! As a general rule of thumb most cash back and frequent flyer miles earned are not taxable. Cash back and frequent flyer miles are treated as a rebate, or a price reduction on purchases, therefore they are earned when you spend money. The key word here though is “earned.”

Of course in tax law there are always circumstances where things change and they can become taxable. Any incentive offered for applying for a credit card, such as the 15,000 miles offered above or the money I received is taxable because you are receiving income or assets (miles) for not purchasing any items.

Another example would be if you use a personal credit card where you earn rewards to make business related purchases and then your employer/business reimburses you.  It is considered trying to cheat the system in the eyes of the IRS since you are receiving money and technically paying nothing. Other than those two cases you are good to go! Unless the law changes, of course.

These rewards are a great perk so do not let paying taxes on them deter you. Most companies do offer great sign up incentives so take advantage of the ones that make the most sense for you. Just make sure this year when you’re filing your taxes you claim those rewards if you meet the criteria above!