John Bullis: Credit card rewards: Taxable income or not?

There are many credit cards around that will pay you rewards in cash, airline miles and other items.

The question is “are the rewards taxable income?” The answer is “Yes” if the items charged that give the rewards are business expenses. That is just like a reduction in the cost of the item (expense).

The answer is “No, not taxable income” if the items purchased that gave the rewards were personal items like groceries. IRS views those rewards as more of a discount than additional income.

IRS has decided airline miles and other travel-related rewards are not taxable income, even though those rewards are worth having. However, if the airline miles or other non-cash rewards are given to you without you spending any money, then the value of those rewards is most likely taxable income. You may receive a form 1099-MISC that would show the taxable income amount.

If you get a bonus just for opening a bank account, that bonus is probably taxable income. If the bonus is less than $600, then you may not get a form 1099-MISC but it is still taxable income.

The main thought is to avoid taxable income for credit card rewards, try to only get credit cards that offer rewards when you spend a specific amount of money within a defined length of time. The rewards from cards that give points or miles based on how much you spend are usually not taxable income (unless business expenses are involved).

At this time, IRS considers rewards earned with a credit card as a rebate, instead of taxable income. However, the Tax Court Case of Parimal Shankar in 2014 regarding the 2009 return decided the $688 value of airline miles from Citibank was taxable income.

Mr. Shankar and his wife represented themselves at the Tax Court (not usually a good idea). The court said Mr. Shankar “…provided us with no information” concerning why Citibank awarded the thank you points. The court said “….we are not here dealing with the taxability of frequent flyer miles attributable to business or official travel. IRS Announcement 2002-18 said IRS would not assert taxable income for miles received for business travel.”

Mr. Shankar did not provide the court with information as to how the miles were used. It seems if he used the miles (reward) he received for business travel it would not be taxable income. However, since the court was not given information that business travel was involved, it was taxable income.

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