This week I participated in the Carnival of Personal Finance at The BagLady where my article about choosing the right Roth IRA broker was included.
Here are a few other personal finance and frugality articles around the blogosphere that I enjoyed reading this week. Please have a look:
Not too long ago I went on vacation in East Asia. While I was there I had the fortune to be accompanied by local friends who could spot me so I didn’t need to convert my American dollars into local currency. However there were at least two occasions when I glanced upon several beautiful small wooden art pieces that I wanted to buy. While I had a few local currency bills on me, it wasn’t enough to buy the slightly expensive art pieces. So I had to resort to what I ordinarily would do back home in the United States – pull out my trusty cash back credit card. Fortunately, I had the foresight prior to traveling to another country, to research and familiarize myself with credit card foreign currency exchange fees.
Watch Out For Hidden International Credit Card Foreign Currency Exchange Charges
While foreign currency exchange fees are now generally listed and disclosed by credit card companies, card issuers rarely publicize these hidden charges, preferring to leave them in the fine print. While some complain that the majority of these interchange fees are not used to process the actual currency exchange, but rather used to fund credit card reward programs and other direct advertising campaigns, the real concern is the lack of education when it comes to incurring these fees. Frequently, consumers who use their credit cards overseas come home to the unwelcome surprise of costly fees on their billing statement.
The foreign currency transaction fee for credit card purchases is comprised of two parts – the fee percentage charged by the card payment network (such as Visa, Master Card, Discover, American Express) and the fee percentage added by the card issuer (such as Citibank, Chase, Bank of America). Visa and MasterCard impose a standard 1% fee on all foreign currency charges to cover the expense of converting your foreign currency purchases back into U.S. dollars. The fee is imposed on the card issuer, but the expense is usually passed onto the consumer. Banks and card issuers that issue Visa and Mastercard also tack on their own additional transaction fee to the total – usually another 2%.
American Express does not have an extra card issuer fee, but it does impose its own foreign currency conversion charge of 2%. Previously, Discover Card was the only major card payment network that levied no foreign purchase transaction fees, however they have now updated their policy and tacked on the nearly ubiquitous charges. But then I challenge you to find a place overseas that actually accepts Discover Card. I think those living abroad probably have never heard of Discover before, likely thinking it’s some off shoot of Visa or Master Card.
Credit Card Issuers That Have No Foreign Currency Transaction Fees
Capital One credit card is one of two major issuers that charges no foreign currency transaction fee for credit card purchases made abroad. While Visa and Mastercard still levy fees on Capital One – the card issuer has made the conscientious decision to waive the fees as a cost of attracting customers. Thus it looks like your best foreign purchase bet would be to apply for a Capital One Visa Or Mastercard to avoid the expensive and cumulative currency exchange transaction fees. I personally have the Capital One No Hassle Miles Card, which I use to earn 1.25 miles on each dollar spent, good for any airline with no seating restrictions, mileage cap, or expiration date on miles earned.
List of Credit Card Foreign Transaction Fees Sorted From Lowest to Highest
Today, most of these foreign transaction fees are laid out in more readable form on your monthly credit card statement. Sometimes they are denoted by a simple asterisk indicating the fee percentage that was levied, while some card issuers will list the actual dollar amount of the transaction fee portion. The transaction fees I’ve provided below include the total combined charges imposed by both the card issuer and the card payment network. Pay attention to some of the hidden special offers out there, especially the ones from more obscure credit unions and brokerage/banks.
| Credit Card Issuer/Offer |
Fee For Foreign Currency Transactions |
| Capital One | 0% |
| Schwab Bank | 0% – Schwab Bank Invest First Visa |
| Stanford Federal Credit Union | 0% – SFCU Visa Cards |
| Affinity Federal Credit Union | 1% |
| NASA Federal Credit Union | 1% |
| Pentagon Federal Credit Union | 1% |
| USAA (Military) | 1% |
| American Express | 2% – Not Generally Accepted Overseas |
| Discover Card | 2% – Not Generally Accepted Overseas |
| Advanta | 3% |
| Bank of America | 3% |
| BB&T Bank | 3% |
| Chase/Washington Mutual | 3% |
| Citibank (Citi Card) | 3% |
| HSBC | 3% |
| PNC (National City) | 3% |
| SunTrust Bank | 3% |
| TD Bank | 3% |
| U.S. Bank | 3% |
| Wells Fargo | 3% |
Reminder Before Using Your Credit Card To Make Foreign Purchases
Modern credit card programs today implement sophisticated transaction software to detect fraudulent and unauthorized credit card activity. If your card has always been used in the New York tri-state region for example, but suddenly credit charges start streaming in from some place like Thailand or Indonesia, your card issuer may raise an eyebrow and start declining those international charges as part of their anti-fraud measures. A quick e-mail or phone call to your credit card company before you travel should prevent such an inconvenience from happening.
Credit Card Users Who Have Made Credit Purchases Abroad May Be Entitled To A Cash Settlement
If you made a foreign transaction using your Visa, Mastercard, or Diner’s Club credit card at least once between February 1, 1996 and November 8, 2006, you may be entitled to claim money from a legal settlement. In response to an anti-trust class action lawsuit brought against Visa, Mastercard, and Diner’s Club for alleged fraud and conspiracy to fix and conceal foreign currency transaction fees on credit card purchases to the detriment of card issuers and consumers, a legal settlement has been worked out. Under the settlement terms of In re Currency Conversion Fee Antitrust Litigation (MDL 1409), those who fall under the plaintiff class have three ways to participate and claim their settlement money.
While two of the options require that you gather your billing statements and receipts to verify the estimated value of your foreign credit card purchases, the simplest method for most is to file for the Easy Refund option, which is the route I personally took. As noted, this option is recommended if you traveled outside of the U.S. for less than one week or had foreign transactions of less than $2,500 using your eligible cards during the 1996 to 2006 period.
Reward credit card and cash back rebates are great because you get to earn money and receive what is essentially a discount for making ordinary everyday purchases. Today I decided to review my credit card accounts and convert some of my accumulated reward points into usable cash back and retail gift cards. For my versatile Fidelity Investment Reward Card, which earns me 1.5% back on all purchases, I converted 5000 World Points into a $75 deposit towards my linked Fidelity trading account. I also redeemed 40,000 of my total balance of 46,155 Citi Thank You points into four wonderful $100 retail gift cards. I chose to receive high value rewards with the best ThankYou redemption value, and picked out gift cards from Marshalls, Macy’s, and Gap. Looks like I’ll be going bargain clothing shopping again in the near future in about 1-3 weeks when they arrive.
Am I Supposed To Report Credit Card Rewards and Cash Rebates On My Tax Return?
My reward redemption routine is a ritual that happens at least once every year. Over the years, I’ve earned quite a tidy sum of credit card rewards comprised of cash back, rebate points, airline miles, and gift cards. But I’ve never listed the earnings as taxable income on my federal income tax return or reported a single cent of my rebate earnings to the Internal Revenue Service (IRS). I simply haven’t given it much thought until recently. For the last few years I’ve probably pulled in at least $3,000 worth of personal credit card reward earnings, whether it be through credit card sign up bonuses or through regular cash back rewards that earn up to 5%. But recently I’ve been thinking – these rebates, rewards, and gift cards I’ve been earning and redeeming do add up to quite a substantial sum. Am I under some obligation to report them as income? After all, the credit card earnings do as a practical matter increase my overall wealth, albeit subtly. Or are they considered income exempt from taxation?
When it comes to earning credit card rewards, although I regularly exceed the $600 reward income threshold, I’ve never received a 1099-MISC for my card rebates. My understanding is that the credit card company would have been obligated to send me a 1099-MISC form if the cash back rewards were deemed taxable. Of course, for that to somehow happen, the credit card company would need to treat me as an independent contractor and the credit card rebates as some type of income in the ordinary course of trade or business.
Reviewing the IRS’ Likely Position On The Taxation Of Cash Back Credit Card Rebates and Rewards
As was addressed in a past Wall Street Journal article, the IRS has not offered definitive legal or tax guidance on whether credit card rewards or rebates are subject to federal income tax. However, in an often referenced IRS private ruling letter on the matter, the IRS did indicate that the individual seeking the ruling did not have to include certain credit card rebate rewards as taxable income on his federal tax return. (PLR 200228001). While it should be duly noted that an IRS private letter ruling statement only applies to the requesting taxpayer’s specific set of facts and should not be regarded as precedent or legally binding for everyone else, such release of information by the IRS does shed light and give us an insight into how the IRS views such issues. These written statements can help us meter the agency’s approach on a particular tax issue.
Tax professionals and advisers on the matter have generally taken the view that credit card rebates are not considered taxable income that needs to be reported – seeing them as more of a reduction in purchase price than anything else. Their assessment is more likely in tune with the position the IRS would likely take as well. Although not precisely addressing the issue of credit cards rewards, in IRS Publication 17, the agency indicated that the cash rebate an individual receives from a dealer or a manufacturer of an item purchased is not considered taxable income, but the individual must reduce the purchase item’s basis by the amount of the rebate.
Again, while not perfectly on point, this statement at least suggests that your credit card reward earnings are likely not taxable because they are more akin to an incentive discount or financial inducement to buy certain products with after tax dollars than anything else. The same way receiving a retail coupon from a product manufacturer would not be regarded as taxable income, cash and reward points in the form of gift cards redeemed using credit card earnings would not be either.
Of course, if a business entity earns rewards using company credit cards that it redeems and shares with its employees, the taxability question may be different. While the rewards received by the business is likely to be viewed as non-taxable, once the rewards are passed onto the employees, their character is likely to change. At that point they likely become more of an income distribution in the course of business. The fair market value of such distributions would likely have to be reported as taxable income by the employees and employer as such increases in wealth need to be declared.
Updated – The IRS has released the official 2008 Economic Stimulus Payment Schedule.
Also, read about the prospects and chances of an Obama stimulus check for 2009.
Based on the substantial traffic and comments I’ve been receiving for the article I wrote explaining and breaking down the details of the 2008 Stimulus Rebate Package, it’s clear that everyone in the United States is concerned about their rebate checks. Everybody wants to know how large their own tax rebate check will be and when they can expect to receive it.
There are many questions to be answered and I’ve been trying my best to respond to them all. While most questions have been straightforward, others have been slightly more complicated with issues relating to Chapter 7 and 13 bankruptcy filings, or issues relating to wage garnishment and student loan liens. But I will continue to do my best to answer your flurry of tax rebate comments and e-mails.
Visit The IRS Website For The Official Source Of Tax Rebate News and Updates
While I can’t necessarily state that all answers that I provide are definitive, I do try my best to answer accurately based on research and reasonable information. One thing I have noticed is the vast amount of misinformation and speculation that is available on the internet. There seems to be much conjecture and rumors surrounding the tax rebate, particularly as it relates to timetable and the order that the checks will be sent out. I wish to remind readers that the only definitive source for tax rebate news and updates is the official IRS Economic Stimulus Payments Information Center (official website). There, they’ve done a pretty decent job of addressing the seemingly endless stream of tax rebate inquiries, even providing answers to popular tax rebate questions (Tax Rebate FAQ). The IRS tax rebate website provides stimulus check payment hypotheticals and answers questions pertaining to Social Security recipients and veterans living on disability. They post updates regularly and understandably so. Here’s a quick link to some of the official tax rebate questions and answers for various filing scenarios:
Here’s the official information release for recipients of alternative types of income:
If you still have unanswered questions, please continue to post comment questions to my original Bush Tax Rebate article. I will try my best to diligently answer each one as best as I can. Keep in mind that while I do have a legal and financial background, you will be best served asking your own tax professional or hired attorney the more substantive tax and legal questions, particularly when it relates to more delicate legal issues surrounding bankruptcy and liens. My informal opinions should only be viewed and regarded as general background information rather than seen as authoritative financial advice.
