Are Credit Card Rewards Taxable?

January 25, 2008

This is an interesting question, and one that I’ve thought about quite a bit in the past…

According to the Wall Street Journal, the IRS hasn’t issued much in the way of public guidance on this matter. The IRS did, however, issue a private letter ruling in 2002 that said certain card rebates are not considered taxable income. While a private letter ruling applies only to the taxpayer that requested it, this at least gives you a sense for which way the IRS is leaning.

In addition, IRS Publication 17 says the following:

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.

Of course, a manufacturer or dealer rebate isn’t quite the same as earning cash back on a credit card, but the underlying principle is highly similar.

I also dusted of my copy of Ernst & Young’s 2007 tax guide and they say:

The IRS realistically views rebates as another way of offering a price reduction to induce you to buy a product… The same rule applies to any cash rebates you might receive from your credit card company for using its card.

So there you have it… While I’m not a tax professional, I’m comfortable enough with these bits of information that I have no qualms about treating my credit card rewards as tax-free.

Posted in Credit Card Tips