I often forget how easy it is to get started with tax prep since I’m surrounded by very competent and ethical fellow CPAs that have spent a lot of time and effort to get where they are. My only bad experience was taking my first W-2 and 1099 to a “Jackson Hewitt” in a Wal-Mart when I was a teenager.
If it’s true MS, that’s not entirely correct. For example, using a 2% cash back card on the dollar coin deal, would result in taxable income of 2% (technically).
Money orders, etc would have a similar analysis.
Whatever you say.
Sadly my wife’s employer was hit with a ransomware attack and their finance department is completely hosed. They asked the IRS for an extension to get employees their W-2s but my guess is that they will never be able to recover the data.
We have a copy of the final paystub for the year so, worst case scenario, we will alert the IRS and file form 4852. I don’t think 4852 is e-file friendly so that means we’re stuck filing a paper return this year unless we get a W-2 for her.
You are likely referring to an IRS private letter ruling from 2010. This PLR is frequently cited in support for the notion that MS proceeds are tax-free, but in my view, it says no such thing.
Here’s the relevant part of the IRS’s analysis in the ruling:
The usual rule is that rebates are a reduction in an item’s basis, not taxable income. That’s no different when the rebates take the form of credit card rewards. That’s the scenario the IRS is referring to: when you buy a computer for $1000 and get $20 back from your credit card, you’ve paid $980; your basis in the computer is $980. The rebate is directly related to, and the result of, the purchase; it’s not an accession to wealth. (If you were taking a tax deduction for the computer – for example, if the computer was for business use – you could only do so on the $980 adjusted basis, not the $1000 gross purchase price.)
In a typical MS loop of CC -> VGC -> MO, my view is that you have two separate transactions there: the VGC purchase with the CC and the MO purchase with the VGC. The MO purchase is where I believe the tax consequences arise. At the conclusion of the first transaction, you’ve effectively purchased a VGC at a discount (we’ll say $500 plus a $5 fee minus $10 in CC rewards). If you turn around and give it to someone as a birthday gift, I don’t think there are any tax consequences (assuming your gifts aren’t so substantial as to trigger the gift tax); you’ve effectively given a $495 gift instead of a $505 gift. Here, it seems reasonable to treat the rewards as a basis reduction and not a taxable gain.
But, on the other hand, if you take that VGC you paid $495 for and buy an MO, made out to yourself, for $499-something, I don’t see how you can argue that’s not an accession to wealth. Let’s put it another way: if you sold the VGC to someone for $499, you would unambiguously have a taxable gain on this transaction. What difference does it make that you turned the VGC into a negotiable instrument (that you then deposit into a bank account and receive the full value for) instead of actually selling it? I concluded that I could not in good faith argue that there was a distinction.
Finally, PLRs are not binding on the IRS except with regard to the taxpayer they are issued to. This is not something you could cite as binding precedent yourself.
The usual disclaimers – I am not a lawyer or tax advisor, don’t rely on this, consult your own lawyer, blah blah blah – apply to the above. Your research might lead you to a different conclusion.
The flip side is that when you make a purchase with your gift card, you are not selling it, you are consuming it as the product is intended to be used. No different than anything else you may purchase with it; if that $5 pizza you ate for lunch, bought with a gift card that only cost you $4.75, doesn’t result in $.25 taxable income, nothing else you buy for your own use would either. Run off to an ATM with that gift card to withdraw cash and you might have a point. Sell that gift card rather than spend it, and you might have a point. But a purchase from an independent merchant is a purchase, no matter what is being purchased. And a PLR may not be binding, but when it’s the closest on-point guidance available, at minimum it demonstrates acting in good faith.
Regardless, it’d be a very very bad idea to continue down this rabbit hole. Any further discussion is just going to go in circles, there is no definitive “right” answer until there are decided cases establishing what’s correct. And the IRS has thusfar been (rather diliberately) avoiding the issue.
The fundamental difference is that USD cannot have a basis lower than its face value.
I’ve studied this topic in more depth than any other topic in my career. I’ve consulted with the top tax minds in the country. While many disagreed with the more controversial parts of my positions (related to frequent flyer miles and credit card points, and specifically where any reductions in basis would apply), there was zero doubt among all of them that the classic MS would result in taxable income.
I agree with your characterization of the PLR - while not binding precedent, they can be persuasive to a judge, and if the facts are similar, the IRS would likely have to distinguish the facts in some way.
As for the lack of cases, while that sometimes means it hasn’t been considered or deliberately avoided, it may also mean the answer is so clear that a taxpayer would never take it to court.
I think this is due to an analysis of how complicated it’d be for the IRS to track all this activity vs. the return in added revenues it’d potentially generate. Look at the situation with Use Tax being left to self-reporting because it’d be an incredibly large mess to process accurately. And also consider how limited MS is in missed revenues even compared to something like Use Tax. That’s not even getting into credit card rewards that are in airline miles or points. Since there’d be no practical way to determine the basis of the item purchased until point redemption and the value of each mile/point may vary greatly.
So to me, the IRS decision may not be as much whether technically it’d be taxable income but whether, practically, it’d be worth determining consistent and fair taxation and enforcing compliance.
That’s pretty much my point - they can see where all the subsequent arguments can go, and thus arent making that determination in the first place.
To note, I’ve been investigated by Treasury Agents, and interviewed at length. They didnt even question the taxiblility of my ms, beyond stating that they know my credit card rewards werent taxable. Their interest was in ensuring “credit card rewards” was the purpose of my money movements, and that I wasnt using it to mask other income sources. Of course that’s far from being definitive, but it does reinforce the position.
This may not be applicable till next year, but came to mind as I was doing this year’s taxes. If your state income tax is limited this year and you receive a state income tax refund. Do you have to claim that as income the following year since you didn’t get the full deduction of state income taxes.
I have $5000 in property tax which leaves $5000 in state income tax to deduct, but I withheld $7000. So I can’t deduct the last $2000. But I got a $1000 state tax refund. Normally this $1000 would be taxable. But if I had only withheld $6000, I would have owned $0 and got no additional deduction. So I see this as not being an offset of the prior year’s deduction. But I haven’t seen anything addressing this situation.
No, you wouldn’t have to include that additional refund in income.
If you itemized and took the full state tax deduction on year 1, then the tax refund would count as income in year 2. Basically, if you paid too much state tax and deducted the full amount, you reduced your federal tax liability in that year. To make up for it, the next year you are going to pay federal tax on whatever excess state tax payment you reduced you previous year federal tax liability by (your state refund amount basically).
But here, since you only deducted $5000, not $7000 as your state tax, the extra $1000 you paid in state taxes (and that was refunded) did not create a lower federal tax liability. That said, I’d let the worksheet (or tax software) do the calculation that you owe no additional tax from the refund next year. If you failed to report your state tax refund (reported to IRS on 1099G), it will likely trigger an audit flag.
Still waiting for 1099 from brokerage.
TurboTax had an update 2 days ago and another update today. Hence a reason not to do your taxes ASAP.
These updates may or may not impact your return. But if they did and you were impatient to file ASAP, better make sure they didn’t impact them.
Most likely the updates included some forms weren’t final yet, not because it made incorrect calculations. TaxCut isn’t letting me file until I get an update with the final forms.
Oh wow. That’s pretty bad. I don’t think I’ve ever seen a calculation problem in TaxCut, and I start before the updates are out. I’ve seen a missing question for a checkbox (which then gave wrong results), but not a pure numbers problem.
I’m still waiting on 3 1099’s that I can’t pull from the websites. I’d think they should be here by now. Side note, first time filing with a Schedule C. Learned a ton going through the process.
Am I alone that I actually look forward to filing taxes? Sort of like a game of chess to see how many deductions I can take and how to manage AGI to accomplish that, and how low I can get my % taxable income each year.
I finished mine tonight, and am happy to report that I owe no penalty for under-reporting income. I will be filing and paying on April 15th. I hope the govt shutdown is in full force and that they won’t get around to cashing my check for months.
Yes? Because you can figure out most of it around November or December before the tax year. Most numbers (like tax rates, schedules, and phaseouts) are usually published by then, because employers have to update their payroll systems. It’s usually too late to actually change anything if you don’t plan way before the tax filing season starts. Also it’s not a game of chess, because your opponent isn’t making any moves. It’s just algebra.
This year was a little different, because the SALT limit was in question while some states were trying to fight it and QBI guidance and related form wasn’t published until recently. Also I didn’t know how it would work in case state tax law isn’t in sync with federal, and state may allow some deductions that federal no longer allows.
Do you mean for under-paying taxes owed? The underpayment form 2210 isn’t done yet, expected 2/15. Your under-payment was probably too low (<1K?), so you don’t need that form. I also underpaid without owing a penalty, but I need to wait for that form.