Court order imposing tax on credit card premiums for certain expenses (which you probably don’t do)
Gary Leff is 25 years old. February 2021.
When you earn air miles, the miles are tax-free because they are a discount – so you get most of your own money back.
When you earn miles to fly to work, those miles are essentially a cut of your employer’s money. In theory, it should be taxed as income, but that would be a real headache and the IRS has explicitly stated that they will not try to tax it.
If you earn miles or cashback for your credit card spending, this is also a rebate, not a tax. All you get in return is a small part of your own expenses.
Oddly enough, the initial premiums you receive after you get a new credit card are usually not reflected on your tax return either. If you have to spend money to get a bonus, it may be considered a reduction in your expenses (even if it is a reduction in a very large portion of your expenses). But not all card bonuses require spending, and 20 years ago that was almost never the case. But they were not taxed.
When you earn miles for recommending a credit card, it’s taxable because it’s not a rebate – it’s essentially the issuing bank paying you for your marketing services, paid for in the form of reward miles. If you earn miles from the bank instead of interest, you will also receive a 1099 for this.
Until recently, BankDirect did not send 1099 forms to verify mileage – but people are often confused by the fact that a 1099 does nothing taxable, it’s just information reported to the IRS. The activity can be taxed whether a 1099 is sent or not, and a 1099 does not dictate taxability (or the income you received, you can dispute the 1099).
Which brings us to a very interesting tax case that Miles remembered.
- In 2013 and 2014, the couple purchased more than $6 million worth of gift cards and other financial products with their Blue Cash Amex, earning 5%.
- They converted their purchases back into cash (via money orders) and used the cash to pay off their credit cards.
- The IRS wanted to pay them back more than $300,000 in cash.
The IRS argued that this could not be considered a refund, and the Tax Court agreed – in part. Postal money orders and the upgrading of payment cards are not purchases of goods or services, according to the Court, so that the profit from these activities is taxable. However, the Visa gift cards were real services and so the rewards were a discount.
The court focused on the details of the purchase, although I also note that Visa gift cards typically come with a commission, so – as with initial credit card rewards – the discount is just very significant compared to the purchase.
Moreover, the court acknowledged that the hair had been cut here, but attributed this to the turnaround of the IRS, which generally does not levy taxes, but attempts to do so in this case. In the end, the court even acknowledged that it only became a problem because of its scale and the attention it attracted,
Aggressive attempts by claimants to generate reward money have presented the IRS with a dilemma, largely because of the IRS’s imprecise policy on credit card rewards.
Petitioners have clearly benefited economically from the skillful and ruthless manipulation of the rewards program. Their actions never offended American Express, and if Mr. Anikeev had not been so successful with his efforts, he probably would have been ignored by the IRS.
However, the magnitude of the acquisition success makes this case an extreme test of the long-standing unverifiable nature of credit card reward programs.
I don’t think people who made over $300,000 in cash in 2013 and 2014 will be as successful with the American Express card today.
I should also note that anyone who has purchased a million dollars or more in coins from the US Mint is lucky that the IRS can’t verify the absence of fraud that far with proper tax returns.
More information about thewing
frequently asked questions
Do you receive taxes on credit card rewards?
Do I have to pay tax on the premium money?
When someone accepts a scholarship, it is reported on federal and California tax returns, and the recipient must pay taxes on any marginal tax benefits. … Just because you have income doesn’t mean you have to pay tax on all your income.
Are corporate credit card rewards taxable?
In other words, no, your credit card rewards are not considered income and therefore not taxable. … Whether you receive credit card rewards in the form of cash back, statements, gift cards, or travel credits, you don’t pay taxes on these rewards.
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