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Are Credit Card Cash Rewards Taxable?
By JLP | January 15, 2007
FMF sent me an email asking the following question:
Are cash earnings on credit cards (cash earned as rebates on cards) taxable as income? I had a reader ask and my gut feeling is “yes”, but I thought I’d ask a tax expert.
My response:
Well, I’m FAR from a tax expert but this is the closest thing I could find in IRS Publication 17:
“A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.”
I realize that cash earnings from a credit card are not the same thing as a manufacturer’s rebate. However, my gut tells me that cash earnings are not taxable because it is essentially a rebate on products you have purchased with after-tax dollars. BUT, I am NOT a tax expert and the IRS doesn’t always do stuff the logical way.
UPDATE: I did find this explanation in my copy of The Ernst & Young Tax Guide 2007
The IRS realistically views rebates as another way of offering a price reduction to induce you to buy a product. Similarly, the dividends that a life insurance company pays you are a reduction of your premium rather than an addition to your gross income. The same rule applies to any cash rebates you might receive from your credit card company for using its card. (Emphasis mine)
What’s frustrating is that I did a search on the IRS website and couldn’t find an answer. A definitive “yes” or a “no” would be nice.
What are your thoughts?
Topics: Credit Cards | 10 Comments »
January 15th, 2007 at 4:06 pm
Thanks! You’re the man!!!!!
January 15th, 2007 at 4:41 pm
I actually covered this last May when a similar post came up on the TaxProf blog.
http://www.kirkwalsh.com/blog/2006/05/10/tax-consequences-of-rebate-cards/
I came to the same conclusion. It might be, but the IRS isn’t going to go after it.
January 15th, 2007 at 8:21 pm
I’d read the same thing (that credit card rebates are not taxable). On the one hand, it’s surprising that the IRS isn’t taxing something. On the other hand, rebates don’t “feel” like income, so I guess I’m not too surprised.
January 15th, 2007 at 10:26 pm
I thought the IRS sent out guidance that it was just a cost basis reduction on the price of the item… ie rebate.
January 16th, 2007 at 7:46 pm
Great to know! I’ve always been a fan of cash back credit cards, in part, because the rewards are tax free — or so I always thought based on the “just another rebate” argument and the fact that I never received a 1099 from a credit card company even when my rewards were quite large in years I traveled a lot.
Thanks for the confirmation!
January 17th, 2007 at 2:02 am
Oh good! I had wondered about that too.
January 19th, 2007 at 6:21 am
Star Money Articles for the Week of Jan. 15
Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: AllFinancialMatters asks if you’re broke because you overspent on a car. He also did me a favor and addressed my question of whether or not credit
January 19th, 2007 at 10:41 am
What about rewards for opening a bank or brokerage account? Do you think those would work the same way (since you’re not exactly purchasing anything)?
Thanks.
March 24th, 2007 at 9:42 am
If a business earns credit card rewards and shares those rewards with its employees as part of a bonus program, are the employees responsible for reporting additional taxable income even though the bonus is not in the form of cash but reward points?
January 23rd, 2008 at 4:30 pm
I’m not a tax expert, but I did read the IRS advisory on declarable income. All money, products, and services received is to be reported, unless the IRS says otherwise. Certainly those business credit card rewards have a market value and must be reported if they were earned by the company and spent by employees. The “otherwise” covers things like Holocost survivor reparations and special cases that Congress has spelled out.