Client Newsletters

Temporary extension of the employee payroll tax break. The employee portion of Social Security will remain at 4.2% versus the normal 6.2% for two months through February 29th, 2012. This includes a 2% drop in the self-employed tax as well.

What this means:

Extension of unemployment benefits to those who have been out of work for some time. The recent legislation extends Federal unemployment benefits for another 60 days on all tiers.

What this means:

As 2012 is a presidential election year, there will be much discussion, but also much uncertainty about what, if any, tax legislation is passed. Unless Congressional action takes place, the following tax provisions expired at the end of 2011.

What this means to you

If the past actions are any indication, you should assume some of the expired tax benefits will be extended into 2012. Unfortunately, if like 2010, the change could take place in the last few days of the tax year. So be prepared by;

	saving receipts and documents to take the deduction should laws change
	delaying contributions that you may have made directly from your IRA
	conducting tax projections to understand the impact of the law change and adjust withholdings accordingly.

Are Rewards Taxable?
Two points of view.

The answer is...probably not, but it depends on differing points of view.

Rewards are Rebates. Since the retailer is the one ultimately paying for the credit card programs through their credit card fees, these programs could be deemed a purchase price reduction or rebate. This perspective means that you are simply paying less for the product you bought, just as the value of coupons used to purchase a box of cereal are not deemed income.

Rewards as incentives. If seen as a way for credit card banks to offer you a "commission" to use their card, then it could look like income to you. This point of view is based on the fact the credit card company is providing you with the benefit and not the merchant.

What does this all mean?

While there are no hard set rules in the tax code about these programs, they are generally seen as non-taxable income. While not a finite decision by the IRS, their Announcement 2002-18 provides guidance as to the non-taxability of the benefit:

"Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayers' business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.

This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits..."

While this clause addresses the personal benefit of business related credit card programs, might one assume it also applies to personal use programs?

So why the 1099?

You may receive a 1099 from your bank if:

	Their credit card rewards program also includes debit cards or other products attached to a traditional bank account. In this case, the rewards would be deemed as interest on your underlying bank balance. It is appropriate to receive a 1099-INT reporting your redeemed credit card rewards as interest income.
	You redeem your rewards points/miles for cash or other merchandise in excess of $600. If this is the case, you will need to clarify how the bank is perceiving their program.

The bottom line, if you receive a 1099 informational tax form you should report it on your tax return. If it is omitted, it could easily trigger a computer-generated audit. Then, if you believe the program complies with the IRS announcement, you can make the required adjustment.

Hint for Businesses: If you use a cash reward to purchase business related merchandise, remember to reduce that business expense by the value of the reward.