Thursday, December 22, 2016

Taxes and Cashing in Points

My employer has a recognition system based on points. Just like Air Miles and other reward systems, we get to cash in our points for various types of goods and services. What hadn’t occurred to me until recently was the tax implications.

When we cash in our points, the value of our rewards becomes a taxable benefit. So, for someone in a 50% marginal income tax bracket, getting a $100 reward actually costs $50 in additional income taxes. This is still a reasonably good deal, but the taxes have some implications.

Just because a reward costs the company $100 doesn’t necessarily mean it’s worth $100 to me. Fortunately, we have a wide range of reward choices, so it’s likely that I’ll be able to find things I actually want.

However, these points have expiry dates, and there is no guarantee the good selection of rewards will remain. Normally, if you have points that are soon to expire, you’d cash them in for something, even if that something isn’t exactly what you want. Not so in this case. If I have to pay $50 in taxes when I cash in my points, the reward had better be worth at least $50 to me. Otherwise, I’d be better off letting the points expire.

All this feels like looking a gift horse in the mouth. But taxes have a way of taking the fun out of just about anything.

4 comments:

  1. Random question, (might be employer specific) does something like that appear on your T4? or does the employee have to track it themselves?

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    1. @aB: In my case it will be on my T4. It actually gets reported on my pay stub shortly after getting a reward as well.

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    2. My company does that too and I'm not super excited about it for the same reason as you. Being a US based company, the best value rewards are with the US versions of Amazon, Best Buy, etc. But using them that way requires a US address to ship to, or a trip to the US. And I've found that the Canadian rewards are gift cards that don't always work on the company web sites, so a trip to the store is required even if I just want to get them to order something in.

      And worse for me, I pay taxes when the rewards are issued, not when they are spent. But at least the don't seem to expire.

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    3. @Greg: Doesn't sound like much of a reward system. I imagine your employer wouldn't understand if you asked not to receive them. I recall trying to turn down "free" life insurance with my employer when I was young. It was taxable with value based on average employee statistics. I was able to buy life insurance elsewhere for much less than the income taxes I paid on this "free" life insurance. The HR people were quite confused when I tried to turn it down. "We can't do that" was the best answer I could get.

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