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Tax And Financial Thoughts On Credit Card Rewards

Whenever Congress gets back to the business of passing laws, there is one bouncing around in dark halls of the Capital building called the “Credit Card Competition Act.” It is designed to lower swipe fees by giving merchants more choices among networks.

Do you know that every business that accepts credit cards has to pay a swipe fee to the credit card company? Usually 2-3%, sometimes even higher. Many small businesses pass that fee along in a “credit card processing fee” or offering a discount for not using a credit card. In our own firm, we charge a 3.5% credit card processing fee, so most of our clients wisely choose to pay by cash or check instead.

As consumers, we have all gotten pretty good at trying to use our credit cards to maximize rewards, points, etc. What gives the credit card companies the ability to pay those rewards, etc.? It’s all about the merchant fees.

Now, if Congress makes it possible for merchants to shop around and end up paying lower swipe fees, then there is less to give away to the card holder in the form of rewards, points, etc.

This new act might also lower protection of consumer information. New card-processing networks may not be as secure with consumer data. This act may also cause banks to lower maximum credit limits on a card for folks with lower income and/or lower credit scores. Don’t forget, years ago, banks stopped making most of their money by making loans. If their income from credit card processing fees drops, they may have to raise other bank service fees to make up for their lost revenue.

What about those airline miles that some credit cards offer as their “rewards” for using their card? Probably, the number of miles to reach before getting a free flight somewhere will go up, possibly a lot.

Ok, here is one topic that most folks don’t want to hear me say. When are credit card rewards taxable? Simple answer. When the cards are used to purchase business related expenses. Personal purchases currently do not trigger any taxable rewards, but purchases made for business deductible items do trigger the rewards on those purchases being taxed. How many businesses are reporting those rewards as taxable income? Very few. You might expect the IRS to start requiring some sort of reporting to them on rewards received. The problem will be explaining to the IRS which purchases were business related, and which were personal. Oh my, that would be a can of worms!

Have you heard? Ecclesiastes 9:5 says, “Two are better than one, because they have a good reward for their labor.”

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