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URL:  http://boards.fool.com/i-recently-was-looking-into-the-cash-back-credit-28432255.aspx

Subject:  Re: Credit Card Cash Back = Taxable Income? Date:  4/11/2010  8:19 AM
Author:  Patzer Number:  110073 of 121114

I recently was looking into the cash back credit cards offered by Fidelity in partnership with FIA (formerly MBNA), offering 2% cash back (no limit) into Fidelity investment accounts:

www.fidelity.com/investmentrewards

I'm wondering if this cash back is considered taxable income? I would think so, but the Terms and Conditions only mention not exceeding contribution limits to retirement accounts, not the taxable status of the cash back itself:


Contribution limits on retirement accounts is the part of the tax puzzle that's easy to identify. If you put $5000 in an IRA on January 2 ($6000 if age 50 or above) and then the cash back program puts in another $50, you're over the limit. Very straightforward.

The tax status of the cash back itself is a bit tougher to tease out.

In broad theory, the cash back is a return of part of the purchase price for whatever you purchased. The tax character of that cash back depends on what it is that you're getting the cash back for.

If all of your charges are for groceries, which are an ordinary non-deductible personal expense, none of your cash back is taxable income.

If some of your charges are for a deductible expense, the cash back attributable to that expense is a recovery, which will be taxable income to the extent you got a tax benefit from the deduction.

If you use the card for reimbursable employee business expenses, and your employer reimburses you the full amount of those expenses, the cash back attributable to those expense ought to be income. I'm guessing it would belong on Form 1040, line 21; but I'll defer to the tax pros.

In practice, most people use cash back cards for a mix of expenses, make no effort to identify what portion of the cash back might be taxable, and don't report the cash back as income. The card issuers will all have boilerplate language stating that the cardholder is responsible for any taxes on the cash back. That boilerplate language is designed to give the card issuer legal cover if a tax situation blows up on a cardholder. I wouldn't expect the card issuer to be helpful in determining how much of the cash back is attributable to which expenses or to have any clue about which expenses might be responsible for making part of the cash back taxable.

Patzer
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