As you prepare your taxes, you might be wondering if you owe taxes on any credit card rewards or cash back dollars you may have received over the last year. The short answer is “probably no,” but unfortunately the IRS has provided no definitive answer and I’m of the belief they prefer it that way.
The only hint that we have is a private letter ruling from 2002 (PLR200228001) that stated that “The rebates are not includible in Taxpayer’s gross income, whether they are donated to charity or retained personally.” The taxpayer’s original inquiry appears to be whether charitable contributions made in credit card rewards were legitimate deductions (they are) and the IRS continued to state that the rebates are not included in gross income, which is to say that credit card rewards are not taxed as income. A PLR is only applicable to the taxpayer it is sent to but this gives us a good idea of the IRS’s thinking. (earlier that year, the IRS stated that they would not be taxing frequent flier miles)
Finally, in IRS Publication 17, the IRS has stated that a cash rebate on a purchase is not considered income. Tax professionals, in general, are of the belief that credit card rewards and cash back fall into the cash rebate category, rather than the earned income category.
Jim writes about personal finance at Bargaineering.com.