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This article was last updated Apr 04, 2018. Terms and conditions may have changed. For the most accurate information, please consult the issuer website.
Credit cards companies use offers like cashback rewards to entice new and existing customers to sign up and spend, and people like the perks.
Credit card rewards were ranked as the most attractive card feature for consumers, according to the 2016 U.S. Consumer Payment Study published by TSYS, a Columbus, Ga.-based global payments provider.
And while overall customer satisfaction with credit card issuers reached its highest level in 2017 in the history of the J.D. Power Credit Card Satisfaction Study (802 on a 1,000-point scale), the report noted that the cards with cashback rewards received the highest satisfaction scores. Airline credit cards and store-branded rewards cards had the lowest satisfaction levels.
But around tax time, some people start to wonder if those introductory and ongoing cashback rewards, points and airline miles count as income, and, if so, are taxable.
Cashback rewards are not taxable because they are considered cash rebates, said an IRS spokeswoman, who cited the agency’s Publication 525, which reads: “A cash rebate you receive from a dealer or manufacturer of an item you buy isn’t income, but you must reduce your basis by the amount of the rebate.”
As an example, the publication looked at car rebates. After paying $24,000 cash for a car, you get a $2,000 rebate check from the manufacturer. “The $2,000 isn’t income to you. Your basis in the car is $22,000,” it stated. “This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business.”
As for the value of sign-up bonus points, even if they exceed $600, it still counts as a rebate, which is not taxable, according to the IRS. It sent over three private letter rulings on this topic, noting that in all instances, “the rulings found that these points or cash back amounts were not considered income by the IRS.”
If you dig into the IRS Internal Revenue Code, you won’t find anything specifically addressing credit card rewards. Part I Section 61 of the IRS Internal Revenue Code defines gross income as “income from whatever source derived, including (but not limited to) “compensation for services, including fees, commissions, fringe benefits, and similar items.” Some could interpret this as the IRS considering points or cash back as taxable income.
But a letter dated April 5, 2010, read, “taxpayers are individuals who will acquire credit cards issued by a bank through an arrangement promoted by company. Taxpayers will make purchases with the credit cards and, as a result of those purchases, will be entitled to receive rebates,” it said.
It’s not unheard of for a credit card issuer to offer a sign-up bonus with your first purchase, and in that case, the bonus could outweigh the value of credit card purchases — would the rewards qualify as income then? We asked the IRS but didn’t get a straight answer.
“Unfortunately, the resources we’ve sent you are all we currently have to offer on the topic,” said an IRS spokeswoman.
Basically, the IRS sees credit card rewards — whether you redeem them for travel, cash, charity or something else — as a price adjustment, not income. That means you can continue to accumulate and redeem points and miles without having to worry about paying taxes on them.