Is credit card cash back taxable?

Written by john b. king
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Many credit cards offer a cashback rebate on your purchases. Some cards offer the rebate for all purchases made on the card, while others limit the rebate only to purchases made at certain merchants or for certain categories of merchandise. In either case, depending upon the amount you purchase, the rebates may accumulate to a significant amount over time. You may wonder whether it's necessary to declare this amount as income and pay taxes on it.

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Definition

Credit card "cash back" is money that is returned to the cardholder based on amounts charged on the credit card. Depending on the specific card plan, the rebate can range from less than 1 per cent for general purchases up to about 20 per cent for purchases made from certain merchants or for specific items. Some card issuers apply the rebate on your monthly statement to reduce the balance due, while others will periodically send you a check for the amount of rebates you accumulate.

Payers

Cash-back rebates are paid by the credit card issuer and not by the specific merchant where the card was used. Discover Card was the first card to offer cashback rebates and is still the card most widely recognised offering that feature. However, in recent years, American Express and several banks that offer MasterCard and Visa cards have introduced their own versions of cards that offer varying amounts of cashback rebates.

Tax Impact

It is widely believed that credit card cashback rebates are not taxable to the cardholder. Rebates represent a portion of income that already has been taxed, or will be taxed. Also, since they are effectively a discount, or a return of the portion of the purchase price, this is not considered income to the cardholder. Payers of income are required to file a 1099 form with the IRS and send a copy to the individual who received the income. Since card companies do not consider cashback rebates to be income, they do not send cardholders a 1099 form for these amounts.

Precedents

Although the IRS has not ruled specifically on the subject, it has issued some related rulings. In March 2002, the IRS issued an announcement that states, "The IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles." Then, in a "private letter ruling" in July of that year, it ruled that a taxpayer did not have to include certain credit card rebate rewards on his tax return. While "private letter" rulings apply only to the specific taxpayer involved, they are a good indication of the IRS's thinking on this subject.

Applicable Regulations

IRS Publication 17, which details the types of payments that should and should not be included in income, states as follows: "Cash rebates. 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." Although credit card rebates are paid by the card issuer and not by a dealer or manufacturer, it is probably safe to assume that they will be treated the same way by the IRS.

Conclusion

Credit card cashback rebates are not income and do not have to be reported on your federal tax return. However, if you make a purchase of a large or valuable item on a credit card, receive a cashback rebate, and later sell the item, you should reduce your tax basis for the item by the amount of the rebate you received when you report the sale on your tax return.

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