Are Credit Card Rewards and Cash Rebates Considered Taxable Income?

Published 3/7/08 (Modified 1/14/14)
By MoneyBlueBook

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.

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16 Responses to “Are Credit Card Rewards and Cash Rebates Considered Taxable Income?” 

  1. chad says:

    This is a very good article. Thanks for the info. I recently ran into a interesting situation concerning this matter with a minister. I serve on the finance committee of my church and we addressed making the ministers pay for reimburisble purchases using their church credit cards as opposed to their personal cards. There was some ministers who were upset with this new rule because they had been purchasing the items on there personal cards and getting the perk points eventhough the church was paying the bill. It is amazing to me that ministers would want to do something illegal once they are informed that what they are doing is a form of tax evasion.

  2. Aaron says:

    But what I want to know is. When you have a credit card and you use it. Do you report that to the IRS and do they tax you. I am a dependent on my parents and they don't know I have a credit card yet, because college had a lot of unexpected expenses and I did not want to stress them out financially. I have been paying the credit card off slowly, but surely. Do I report the credit card to my parents for the IRS? or does the IRS not need to know or tax me or them on it?

  3. Raymond says:

    Aaron, you don't have to report anything to the IRS regarding your credit card usage. Credit card usage and credit card rewards in terms of cash back rebates, frequent airline miles rewards, and points are not taxed. They considered to be discounts applied against the products purchased with the credit card.

    Your credit card balance and usage history is documented automatically by the big 3 credit rating agencies of Equifax, Experian, and TransUnion however. Just keep paying off your monthly balances on time and you'll be ok. No need to worry about reporting anything to the IRS.

  4. Ryan says:

    I really like what you are doing with your blog. The articles I've read have been very informative and a great resource as researching a lot of this stuff would take hours. Most people would never think twice about not reporting the rewards cash they receive, but as an aspiring CPA, I am glad you looked into this. Thanks for your diligence. I have subscribed via google reader, and look forward to reading more of what you have to say.

  5. Alan says:

    What if an employee uses their personal credit card for large sums of business expenses. Are the rewards they receive from this usage a taxable event on behalf of the company? Would the rewards be considered taxable income?

  6. Raymond says:

    Alan,

    As it currently stands, all credit card rewards, whether they be credit card cash back points, cash rewards, airline miles, or redeemed vacation reward trips - every single one of these are generally regarded as non taxable income. Most tax experts regard all of these as discounts and purchase incentives in the nature of coupons - promotions that are not subject to income taxation requirements.

    It is immaterial if you use your personal credit card or if you use your business credit card to make such reward earning purchases. Neither result in taxable income.

    Of course...it remains to be seen if the IRS will address this issue more clearly in the future. It is theoretically possible for them to rule otherwise in the future and render these credit card rewards and rebates taxable, but I HIGHLY doubt it.

  7. Rick says:

    We are putting together a Rewards Program whereby participants earn "Points" which are then "Translated" into dollars we load onto a co-branded Visa "pre-paid" gift card. Is there a taxable moment when this card is used?

    If so, would we be required to issue a 1099 to these cardholders or simply make the cardholders aware that there are tax implications in the use of the cards in the "Terms & Condiitons" of the program?

    Many thanks ! This is really a gray area, isn't it ?

  8. D.Graham says:

    has any one ever heard of this ? i left my macys credit card go 7 years a go and i guess the bank that offered the card payed them off and the irs is now charging me 214.00 for income that i didn't file on my income tax this year the pay off waS ABOUT 2200

  9. Rick says:

    "has any one ever heard of this ? i left my Macys credit card go 7 years a go and i guess the bank that offered the card payed them off and the irs is now charging me 214.00 for income that i didn't file on my income tax this year the pay off was ABOUT 2200"

    Yep

    http://www.irs.gov/publications/p525/ar02.html

    Look under:
    "Miscellaneous Income"
    "Cancelled Debts"

    You're going to be seeing a LOT of this in future...

  10. Diana says:

    Savings, MM and CD's.
    So my question to Raymond or anyone knowlegeable is:
    1. How do you ensure you will NOT pay taxes on the interest made on these vehicles when you OPEN and ONLY deposit REBATES into these accounts?
    2. Can you notify and contract with the financial institution for this account to be TAX EXEMPT?

  11. John says:

    Does anyone know what is the best credit card with 5% cash back on it & no annual fees? Maybe anyone who knows someone who has it already so they can share the pros and cons?

    I see Discover pop up in the list when I google it, but not sure of this card is widely accepted in most stores (just as AMEX has some stores not accepting it)

    thank you!

  12. Raymond says:

    Hi John, well the "best credit card" offering the best rewards is relative and depends on what you wish to accomplish. Personally, I really like the Citibank Forward Card as it offers 5% cash back rebates at all restaurants, eateries, coffee shops, book stores, movie theaters, etc. But then, eating out is a major monthly expense for me. It's a Mastercard that's accepted everywhere.

  13. Andrew Choi says:

    @raymond

    i want to clarify that CITI doesn't have 5% cash back, rather they offer 5 points on certain purchases. the redemption rate for citi thank you points is not uniform and closer to a maximum of 140points to every dollar. at this rate the cash back rate would be ~3.6%

    Personally, I find their redemption rates confusing and prefer cards with no points involved.

  14. Gabriel says:

    I work for a mid-size company with about 350 employees. This company utilizes a credit card to pay most of its vendors and earns a substantial amount of reward points (about 1M to 2M a month), this turns into about $200K to 300K annually in various types of rewards points which the owner of the company utilizes for person reason and does not declare on his taxes. After reviewing company financials I noticed for the last decade over 2.5M in revenue has been made with the these points but not taxes have been paid on them. Please note the cards are given out to employees at times but mostly utilized by the company owner. Are taxes due on these reward points?

  15. Melinda says:

    To Rick,
    The amount the IRS is stated you purportedly earned can be removed, if you let the IRS know that you did not receive that in income, but it was debt reduction/elimination. Use Form 982 OMB No: 1545-0046 "Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjusment)". [You should have seen my face, when, after a foreclosure and bankruptcy, they told me I owed like 400K!! because the bank 'forgave'.] Note: You MIGHT need to amend your Federal and State Tax Forms for the year, however, traditionally I would not think so to just add this form. If you don't know how to do this, check in your local area for free tax help...it should be readily available now. Form 982 is self explanatory and relatively easy. Good luck.

  16. Arby says:

    what about bank promotions? I signed up for a bank account and received $100 from them. I then got a 1099-INT form from the bank stating that I now have to report the $100 as interest - and the IRS took out $15 off of my refund because of it. I've received actual gifts from banks and there value doesn't get reported, so why is this any different? Also, according to what Interest Income is coming from a bank, it is bonds, savings account interest, etc NOT promotional, incentive gifts. Is the bank wrong in telling the govt I earned $100 in interest that I need to be taxed on if it was a promotional gift? Why would cash need to be reported but not actual gifts?

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