Are Credit Card Rewards and Cash Rebates Considered Taxable Income?
Published 3/7/08 (Modified 1/14/14)
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.