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For those of us who have discovered the secret of making credit cards “pay us back” for all our required goods and services  purchases, this question is one that deserves careful consideration. With credit card rewards programs being cut and whittled down over the past year due to the the banking industry’s financial crisis and changes to credit card rules and regulations, there isn’t much reward program “profit”  left to take for the average responsible credit card customer – especially if Uncle Sam takes a chunk as well. So what is the story with our precious yet diminishing rewards cards?

The good news is that rewards and discounts issued by credit card companies and frequent flyer miles to date have not been considered taxable income. Although the IRS does not seem willing to provide a single black-and-white ruling on this issue, they have at least provided some hints that this is the case – but in a backwards, non-committal kind of way! Here is the evidence we could gather to plead our case:

1. The first is a 2002 publication, Announcement 2002-10, where the IRS announced it would “not pursue the question” of whether frequent flyer miles and other rewards and promotional discounts would be considered taxable income.
2. Later that same year, a taxpayer’s query to the IRS regarding the donation of credit card rewards as a charitable contributions resulted in a private letter ruling PLR200228001  which edicted that “The rebates are not includible in Taxpayer’s gross income, whether they are donated to charity or retained personally”. The interpretation or precedent set by this ruling, although it is not applicable to the public at large, is credit card rewards are not taxed as income.
3. IRS Publication 17 specifies that rewards are taxable if information was provided in exchange for the reward, which in most cases would not apply to a credit card reward or rebate program. Additionally, IRS Publication 17 indicates that when you receive a cash rebate from any dealer or manufacturer for buying an item, that is not your income. However, you are supposed to reduce the basis of your purchase by that amount of rebate.

Tax consultants have generally accepted the view that rebates and rewards on your credit cards are not part of your taxable income, and need not be reported on your federal tax return. But credit card rewards aren’t income, and are in fact a type of rebate; the card issuers even refer to them as such. Considered a reduction in the original purchase price, these rewards and discounts can reduce the cost of a tax-deductible expense.

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Feb 19, 2010
Tags: Card, Credit Card