This time of year, with April 15 less than two months away, the topic of credit card rewards and their taxability, cycle through the news. Mercator Advisory Group watches issues like this like a hawk, but we also consumers just like you.
As a consumer, I manage my cards to maximize rewards. I am not exaggerating when I tell you that my American Express Blue Preferred card indicates that I earned precisely $62.71 in rewards last month. When blended with the prior month, my annual fee is covered with ten more months to go. 6% on groceries is a driver for this. And Amex is undoubtedly not the only card in my wallet.
When we last covered the topic in 2018, the subject was on the shock and awe Citi created by issuing 1099-MISC IRS Statements to cardholders. Today’s read, however, is worth your time as we discuss a pick-up in One Mile At A Time, a fun resource for rewards freaks.
We established previously that credit card rewards, in most cases, are not taxable. Now, consider this story. The story headlines with: “Couple gets taxed for $300K+ in credit card rewards,”
Even with my aggressive credit card usage and points management, I am not in the same zip code.
One Mile at a Time cites this recent IRS ruling, dated 2/23/21.
- In 2013 and 2014, a couple did a significant amount of manufactured spending on the Blue Cash from American Express Card — we’re talking about well over $6 million worth of spending.
- The couple had credit cards offering 5% cashback in certain spending categories
- The couple then purchased Visa gift cards with the credit cards (we’re talking about $6+ million worth of these)
- Then the couple converted the gift cards into money orders
- The couple then profited off of the exchange, earning 5% cashback minus some fees
- The couple generated well over $300,000 in rewards in two years, though unfortunately for them, the amount of spending caught the attention of the IRS. The IRS has demanded that the couple recognize an additional $312K+ worth of income — we’re talking about $35,665 in 2013 and $276,381 in 2014.
In short, it appears that the couple used the same card that I referenced above in my household strategy to bulk up the purchases with gift cards. It seems that the transactions were valid, though the intent may have been funky.
So, the IRS said, appropriately, that this was overboard (and taxable). Were it no so deceptive, it would be funny. Well, it is a little funny anyway.
Credit card rewards have a purpose, to stimulate transaction activity. Even the IRS acknowledges that mainstream usage is not taxable.
For the defendant, you can’t call him uneducated, according to court documents: “In 1995, Mr. Anikeev earned a bachelor of science degree in physics from the Moscow Institute of Physics & Technology (MIPT), graduating summa cum laude. In 1997 he earned a master of science in physics degree from MIPT, graduating with honors. In 2004 he earned a doctorate in physics from the Massachusetts Institute of Technology. During the 2013 and 2014 tax years he worked for IBM as a consultant.”
But for me, who thinks his $62.71 is a win, maybe it is peanuts, but I sleep well at night.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
