Cash Rewards

• A cash reward is usually taxable. Report it on line 21 of Form 1040, your federal income tax return. A reward should be reported on Form 1099-MISC by the entity that issued it. The 1099 has your Social Security number, and the IRS matches the income shown on your Forms 1099 with what you reported on your tax return.
  
  

Airline and Credit Card Rewards

• Airlines companies issue rewards for customer loyalty as an incentive to use their services. These rewards give you discounts on future purchases based on things like frequent flyer miles. Credit card companies also issue rewards based on your use of a card for certain types of purchases. As long as the reward is in the form of a rebate or discount, it is not taxable. For example, if you purchase an item for $1,000 using a credit card and receive a $10 rebate, the rebate is not taxable because it is based on the $1,000 purchase and is really just a reduction of the purchase price.
  
  

Reward Exceptions

• If an employer issues a reward for good service or as an incentive based on production, and it qualifies as a tax deduction to the employer, then it is not taxable by the employee. This rule only applies on qualified rewards paid by the employer where the total amount of the reward paid is under $400. If the total rewards paid exceed this, it might not be deductible by the employer and will be taxable to the employee.
  
  

Consideration

• The penalties for underreporting income can be severe. Check with your tax professional if you received a reward notice. If the reward is reported on Form 1099-MISC it is probably taxable. Rewards such as airline rebates or credit card rebates need not to be shown on your federal tax return.