Usually, you go on accumulating points on your credit card with the hope that you will get something lucrative upon redemption. In addition, credit card companies offer cash rebates. You claim such rewards and rebates almost every year. This routine goes on year after year. Are you required to pay tax on such rewards?

Well, the IRS has not provided definite guidance on this issue. However, once IRS has given a private ruling indicating that such rewards or rebates need not be included on your federal tax return. It is obvious that the private letter ruling only applies to be concerned taxpayer. Only case specific facts are considered while giving such a ruling. But this ruling helps us to know the approach of IRS on this tax issue.

Tax consultants have generally accepted the view that rebates and rewards on your credit cards are not part of your taxable income, and need not be reported on your federal tax return. They are considered as a reduction in the original purchase price.

IRS Publication 17 indicates that when you receive a cash rebate from any dealer or manufacturer for buying an item, that is not your income. However, you are supposed to reduce the basis of your purchase by that amount of rebate.

Let us take an example. If you purchase of a printer for your business costing $400 and used a cash reward from your credit card of $100 for this purchase, then you should deduct only $300 as your business expense.

IRS explains in publications 17 that rewards are taxable if you provided some information in exchange for getting such reward. The rewards and rebates from credit card companies are not available for providing any information and so they need not be reported on your federal tax return.

IRS views such rebates as a way of offering reduction in the price to induce a customer to buy a product. The same rule applies to all the cash rebates which you may receive from your credit card company for using its card. So even if you use personal card or business card for claiming such reward, there is no taxable income to be reported.

Credit card companies go on offering attractive rewards and cash rebates on their cards. You claim them almost every year. Are they taxable? Chintamani explains the present approach of IRS in this article.

Chintamani Abhyankar, is an expert in the field of finance and taxation for last 25 years. He has written many books explaining inside secrets of the magic world of finance. His famous eBook Stop donating your money to IRS which is now running in its second edition, provides intricate knowledge and tips on personal finance.