Tax Consequences of Rebate Cards
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Last week, I wrote about the free money you could be getting back from cash rebate credit cards. One thing that never occured to me is that this could be taxable income. The WSJ has a Q&A item on how the IRS will treat the free money.
The IRS hasn’t issued any specific public guidance on whether cash-back card rebates are subject to income tax, says an agency spokesman. But the IRS did issue a private-letter ruling in 2002 that said certain card rebates aren’t included in a taxpayer’s gross income. Although a private-letter ruling applies only to the taxpayer that applied for it, such rulings are considered to be a gauge of the agency’s thinking on a particular issue. Tax advisers say rebates are generally considered to be a reduction in purchase price, and not likely to be taxed. Rebates on purchases made for business or investment may have more complex treatment, so consult a tax adviser.
Makes sense, but now that I think about it rebates probably should be taxable income since they are not coming from the retailer or manufacturer of the item purchased. Mail in rebates would almost definitely be considered a reduction in price paid because it is a sales technique used by retailers and manufacturers to lower prices to consumers (except for the 1/3 that don’t bother to redeem them). However, rebate cards are not used as a pricing technique but as an inducement to use their card, much like the proverbial toaster from a bank for opening an account.
I highly doubt the IRS will starting coming after me for my $450 in taxable income. But if they decided to, they would likely have a good leg to stand on (legally but not politically).
Hat tip: TaxProf
Technorati Tags: free money, IRS, rebate card
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I agree with you that credit card rebates probably should be taxable. However, another way to think about it is to view it as a rebate on interest paid to the credit card company. An interesting point is that I don’t pay interest. However, another way you can view it as a rebate on the payments made by the retailer to the credit card company and indirectly that translates into higher prices paid by the credit card user. So in a way you are getting a rebate from the purchase price of the product. But, let’s not make too big of an issue about it, or the IRS may make these small benefits taxable.