There's been some confusion about how the Internal Revenue Service views rewards points.
The uproar started when some Citi customers received a 1099-MISC tax form from the bank for the reward miles they got after signing up for a new checking or savings account. The bonus rewards were part of a promotion by Citi.
(Tax lesson: A 1099 form reports miscellaneous income received during the year that is taxable.)
That got people worrying about other rewards miles or points, specifically those tied to credit cards. Are those taxable as well?
Probably not, says Mark Steber, chief tax officer at Jackson Hewitt Tax Service. Traditional rewards you earn by spending money on your credit card are considered nontaxable because it required a financial activity to receive them, Steber says.
The waters get a little murkier when it comes to sign-up bonuses offered by credit cards issuers. Those are the kinds that offer you 30,000 miles or a $300 bonus just for getting the card.
"Those are more complicated and convoluted deals," Steber says, but most of them aren't taxable. Feel free to exhale now.
The reason is because those offers usually come with some kind of transactional hoop to clear before the bonus lands in your pocket. For example, last year the Citi ThankYou Premier Card offered 50,000 points for signing up ($665 in airfare value), but only after cardholders spend $2,000 in three months, according to Synovate. That last part makes the bonus exempt from taxes, says Steber.
Even the teeny tiny requirement of making just one purchase on your Capital One Cash Rewards to get the $100 bonus is enough to keep the IRS from claiming any portion of it.
So only those rewards miles, points or cash you get from doing practically nothing (except signing up) can hike your tax bill because they are treated as gifts. If the amount exceeds $600, the bank is required to send the 1099 form, Steber says. If it's less, it's up to you to report it honestly on your taxes.
Of course, tax laws change all the time, so you never know about next year.
"The IRS is taking a wait-and-see attitude," Steber says. "Some of these programs will have to be looked at (by the IRS) over time. And the bigger they are, the more attention they will get."
Are any of your credit card rewards taxable?
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