Is the money that you get back from deposits or rebates taxable?

Question

Please help me understand if the following two items are taxable or if they should be included at all on the tax report:

1. Rent deposit. A few years ago, when I moved in my previous apartment I put a deposit of $500. This year, when I moved out, I got the deposit back (exactly the same amount).
2. ATM fee rebate. My bank will rebate, at the end of the month, any fee that I pay for withdrawing money using other bank's ATMs. (e.g. I withdraw $20 and there is a fee of $2. My account is charged $22 for that withdraw but the bank will give me back $2 at the end of the month)

Thanks!

Answer 1

No to both. The deposit refund is not taxable, but in states where security must earn interest, that small amount is subject to tax. I just returned a $750 deposit to a tenant, and after a year, it accrued $0.24.

A rebate of fees you pay such as ATM fees is just you getting back your own money. As is "cash back" on credit card purchases. Not taxable.

Answer 2

Rent deposit returned to you is not an income. Its your money to begin with. The homeowner is taxed on taking it and can expense the refund, but for you - there's no taxable event.

ATM rebate is what it is - rebate. A cash discount over the money paid. Basically - the bank refunded you a fee you paid (ATM rebate is a refund of the ATM fee you paid to a third-party ATM operator). Again - your money. The ATM operator and the bank both have taxable income/deduction, but its not your problem. You - just got your money back. No income, no taxable event.

Neither should appear on your tax forms, and similarly nor should credit card points, cash rebates, frequent flyer miles, etc. All are in fact either a refund of your money paid or a merchant discount to you, not an income.

Answer 3

The number one rule of thumb that will generally answer the "is it taxable" question for any money you may have or receive: "Did you pay taxes on it already?".

Pretty much any money you actually get in your paycheck/DD has already been taxed (or at least the projected amount of tax has been withheld) is your money, to dispense with as you will (or according to your pre-arranged obligations, for most of it). Deposits paid are one such example; if you wrote a check or obtained a money order that they then cashed, that's still your money until it isn't; the contract states that it is being held effectively in escrow (though the landlord has free use of it so long as he can pony up according to the contract). Anything not used to pay for damages is yours, and you get it back.

The ATM fee refund is trickier, but basically this is a benefit offered to you as a service by your bank. You front for the ATM fees incurred when withdrawing, and then those fees are refunded to you by your bank (effectively increasing the number of ATMs you can withdraw from "for free"). As long as there is no net income, it's treated like a mail-in rebate; you didn't gain any money, so there's nothing new to tax.

There are a couple of specific exceptions to this otherwise overarching rule of thumb. One is Roth IRAs. Typically, on investments, you either pay income tax on the money going in and capital gains tax on the money coming out, or you pay nothing going in and income tax coming out. With a Roth, however, you pay income tax going in and nothing coming out, even though you're (eventually) getting back more than you put in.

Another is gifts. Whoever gave you the gift paid the taxes on it (or the money to buy it). However, if they give you a gift valued more than a certain limit (changes every year, and there's a lifetime limit), they have to pay an additional gift tax of 35% on any amount over the limit. That's taxing taxed income (usually).

There are other examples, but for the overwhelming majority of situations, if it's money you already had after any and all applicable taxes, it's not taxable even if you haven't seen that money for a while.

Answer 4

Everything I have read here sounds good except for one small detail. My bank does indeed identify ATM rebates as taxable income. They, in fact, seemed to have begun this practice several years ago but somehow forgot to send 1099's to their own customers despite sending them to the IRS. This ended up costing me nearly $2,000 in back taxes to cover 2012, 2013 and 2014. My bank sent a letter of apology and will cover any penalties and interest accrued "due to their error".

No one from the bank ever told me that these rebates could be taxable when I signed on for this special checking account for which I pay a fee each month to continue. So what is the truth, is it taxable income or not? I have now paid for the 2012 and 2013 tax years for something I still say is not income. I am about to pay the 2014 tax bill and will have to pay another $850 or so due to this ruling by my bank. How can this be right??

Answer 5

Schwab phone support (1-866-855-9102) just told me that ATM fee rebates are considered taxable income by the IRS.