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Are rebates taxable?

Dear Tax Talk,
My question is on rebates. Are credit card rebates, such as 1 percent or 5 percent rebates on purchases, taxable events? If I get a rebate check from my Visa card for $300, do I owe tax on this? I am aware of the $600 reporting threshold, so Visa will not generate a report to IRS. Visa customer service states the rebates are nontaxable and Visa documentation states I am responsible for any taxes. What's the real truth? -- Benjamin

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Dear Benjamin,
Not having to pay taxes? Priceless! For everything else, there's the IRS. Usually a prize or an award is taxable income. If you win the lottery, you'll be sharing your luck with Uncle Sam. But if you redeem frequent flier miles, you don't have to pay income taxes. What's the difference? The difference is that the miles are viewed as a purchase price adjustment, similar to a coupon or manufacturer's rebate.

The IRS states:

A rebate received from the party to whom the buyer directly or indirectly paid the purchase price for an item is a reduction in the purchase price of the item; it is not an accession to wealth and is not includible in the buyer's gross income. Rev. Rul. 76-96, 1976-1 C.B. 23; Rev. Rul. 84-41, 1984-1 C.B. 130.

Some credit card companies allow you to gift your rebate to a charitable organization. In this case, you would have a charitable contribution that's deductible if you itemize on Schedule A, and you don't have to recognize the income from the rebate.

Of course if you use the credit card for business, your rebate is a recovery of a tax benefit item so that would be considered income. For example, if you had $10,000 in business purchases and the credit card company refunded you 1 percent or $100, the $100 would be considered income of the business or an adjustment to the cost of the purchases.

Bankrate.com's corrections policy-- Posted: Oct. 27, 2005
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