Award points are available today for a wide range of activities, from keeping a minimum balance in your bank account to charging a certain amount on your credit cards. However, you may not realize that these awards might be taxable.
The IRS has recently been looking for sources of unreported taxpayer income as it seeks to narrow the so-called “tax gap” between what taxpayers owe and what they pay. One example of this is the IRS’s efforts to collect taxes on income that taxpayers earn from all types of sources, including awards, prizes and contest winnings.
And the Tax Court says . . .
In a recent ruling, Parimal H. Shankar v. Commissioner of Internal Revenue, the U.S. Tax Court determined that the “thank you” points a bank customer received for maintaining certain account balances were, indeed, taxable as ordinary income. The customer redeemed the points for an airline ticket valued at $668, which the bank reported as income to the IRS and to the customer via Form 1099-MISC.
The taxpayer and his wife didn’t report this as income on their federal tax return, but the IRS added it to their gross income. The Tax Court ruled that, because the thank-you points were awarded to the customer in exchange for the use of his money, they were essentially interest, which must be added to gross income on a federal tax return.
According to the tax code, as quoted in the ruling, gross income includes “all income from whatever source derived,” regardless of whether cash actually changes hands. Gross income includes “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”
Other often-overlooked income
In addition to thank-you awards, other types of income that should be reported to the IRS but are often overlooked include gambling winnings, barter exchanges and cash earned from side jobs. Tax law can be stressful, call us today so we can help you relax.