Credit Card Rewards Programs and Your Tax Bill
Many Americans utilize reward programs that are associated with credit cards. These reward programs offer rewards to a credit card account holder for using the credit card. In many cases, it rewards a person with points for dollars spent using the card. These points are then used by the account holder to purchase things such as free flights, electronics and much more. Because these programs have increased in popularity over the last decade, many people often wonder if these rewards need to be reported for tax purposes.
The IRS is known for making people account for every dollar earned, but for right now, there is not a specific law regarding credit card rewards. The main reason for this is because in most cases, the rewards a person earns are considered rebates. According to the IRS, rebates are not income and therefore do not need to be recorded as income on a person's tax return. Reward programs do not work exactly like rebates however. Think of a rebate. If you buy a product for $20, there might be a rebate for the product in the amount of $5. You receive the $5 check which makes the price of the product you purchased only $15. So, a rebate in essence, reduces the cost of a product. A rewards program does not work like this however. If you earn 1,000 reward points and redeem it for a product worth 1,000 points, you pay nothing for the product, and receive nothing back. As you can see, these two items are kind of the same, but yet, kind of different.
Currently, the IRS really does not offer legal tax guidance on this subject. Most tax advisors consider these programs the same as rebates, and therefore suggest to clients that the amounts do not need to be added as income on a federal tax return. The basis here is that because these programs resemble rebates, they are simply lowering the price of products a person purchases. They do not actually represent money a person earns, because for one, a person is required to spend money to actually earn rewards. As these programs continue to increase in popularity, the IRS might decide to look further into the implications of these programs and make a clear law regarding how people must handle these rewards.
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