Taxes On MS
I wanted to write this article because I have received a lot of questions regarding taxes on MS. The long and short of it is that the majority of the money that is produced by MS is tax-free. Liquidating gift cards by buying money orders has had legal precedence and has been shown to not constitute income and thus not taxable. If you are curious, you can read the following article about a case that the IRS brought and was won by a couple conducting MS and bringing in $300,000.
However, if you structure MS as a business hiring others to conduct the MS process for you that will save you time and increase overall points accumulation by rotating a lot in quantity and having a defined system in place then you will most certainly have a different outcome then this couple; and you should be structured to pay taxes on income made.
But if you are doing it yourself, keeping small payments coming in, then there is much less of a concern. I would suggest that up to about 200,000 a month is enough to not worry about, but if you get over this number, and certainly above $500K/month, then you should look at it as a business and pay taxes so that you do not attract any unforeseen problems. Better safe than sorry.
When you are at that level, it is advised to discuss your tax strategy with a CPA to ensure the largest savings and best approach moving forward.
Overall though you do not have to pay any taxes on the cash-back rewards that you are getting from your credit cards.
Morally, if you feel a need to pay taxes on the MS that you are doing, you can do so by claiming the “profits” gained from your spending on your taxes. The benefit of doing this is that you are showing more income coming in, and this will look better for lending purposes when you go to obtain loans or credit limit increases that fall under a financial review in the future.
You should note that if you are taking advantage of opening new bank account signup bonuses (which you should), when you simply open a new business or personal checking account, and the terms and conditions state that when you put say $2,000 in then, they will give you a $400 bonus. Most of these are related to direct deposits or the deposited amount. They are also a great way to begin a relationship with a bank. These bonuses are a different beast from cashback, and they are considered taxable.
These bank bonuses are an easy way to make some extra income, and for the last two years, I made roughly an extra $5,000 each year just from opening up new accounts and getting bonuses from them. This is also very important to start building the relationship with the banks sooner than later as it will benefit you in the future. The following is a site where you can find the current promotions for the larger banks in the US.
Other websites will provide all of the bonuses for your state, so do a Google search for those and take advantage.
Know that with these bonuses, you will receive a “1099” from the bank for the bonus amount, you will be required to report to the IRS when you file. So keep your records for your accounting.
Though you don’t have to pay taxes on your MS you can use the IRS to do some manufacture spending. When you PrePay your taxes, you can use a credit card to do so. Note, you must be aware of the fees that are charged for this service, and you must have the ability to cover the credit card bill for the time that they will be holding your money.
If you have a card that is paying over 2% cashback, then you can use the middle payment processor above and pre-pay your taxes. Then, you can file a day or two later, and when you get your return, they will send you a check for the excess amount that you have paid. It is not a huge return, but it can be used to hit sign-up bonuses to get the miles needed for a trip or a small cashback payment. If you overfund by 30K or 40K, this can quickly add up. Again, make sure you can cover the bill while waiting for your return to be processed. You will pre-pay then file your taxes a few days later, and then get the direct deposit return for the overpayment. It can take up to 6 weeks or more, and the sooner you file before the April deadline, the faster the payment can be processed.
This method has been successful for many years and continues to be used by most Credit Counsel Elite members.
Good luck, and God Bless!!!!