This is a guest article written by Michael Dolen, the president of Credit Card Forum.
During this time every year, I always get asked by a good number of visitors on my site about the taxability of credit card rewards. First of all, let me say upfront that I’m just an average Joe (not a tax professional like Bruce!) and therefore I’m not qualified to provide tax guidance. With that disclaimer out of the way, to the best of my knowledge credit card rewards are generally not taxable.
Why don’t they count?
As we all know, the IRS is entitled to a piece of just about everything. Even drug dealers are supposed to pay income taxes. So why aren’t airline miles and cash back being taxed? The reason is that they are generally viewed as a rebate. For example, if you spend $100 and earn 1% cash back, that $1 is essentially a rebate for your spending… you’re not just getting $1 scot-free. It’s similar to how coupons and manufacturer mail-in-rebates are viewed. For that reason, the 1099-MISC form generally doesn’t apply.
Surprise – you’re receiving a 1099?!
Even though – on a historical basis – credit card rewards haven’t been taxed, the IRS has certainly left the door open to do so, as hinted by various comments and quotes over the years. For example, ten years ago they said this:
“Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flier miles.”
That was in a memo titled “Frequent Flyer Miles Attributable to Business or Official Travel” and can be found here. Even though the memo isn’t specific to credit cards, it’s certainly barking up the same tree.
With that knowledge at hand, you can imagine how surprising it must have been when Citi said frequent flyer miles are taxable – they mailed 1099’s to customers who received 25,000 AAdvantage bonus miles last year for opening a bank account.
If you receive a cash or cash equivalent bonus for a new bank account, it’s quite normal to have it reported (usually as interest income). However, this is the first time (that I’m aware of) where a bank has 1099’d people for receiving bonus miles. People are so upset over it, there’s already a class-action lawsuit in the works.
Will credit card bonuses be next?
So far, I have not heard of 1099’s being issued for credit cards bonuses. Citi doesn’t do it on the AAdvantage credit cards which have similar bonuses. That means to the best of my knowledge, Uncle Sam isn’t expecting a cut from your credit card rewards, not yet at least.
However the 1099 fiasco surrounding the bank account miles is certainly a disturbing precedence, if you’re a credit card aficionado like I am. There are scenarios where I could see the IRS and/or card issuers possibly changing their stance in the future.
For example, you get bonus miles after your first purchase with the United credit card. If you’re earning 25,000 miles for spending $25,000 (1 mile per dollar) I don’t think anyone can dispute that’s a rebate, even by the loosest definition. But what if someone signs up for a card, uses it to buy a $0.79 pack of gum, and gets 25,000 miles as their first purchase bonus? I certainly hope it never happens, but it wouldn’t surprise me if the IRS someday decides that the aforementioned scenario doesn’t meet the definition of a bona-fide rebate (and therefore could be taxable).
The reason I’m worried about this now more than ever before is because the credit card bonuses have ballooned to be so large. In fact, many of them have had dollar values which exceed $600. Recently, the Chase Sapphire Preferred and Citi ThankYou Premier card both featured bonuses which were worth up to $625 and $665 in travel, respectively (sidenote: those bonuses are no longer being offered).
What does the future hold?
Maybe my concerns won’t ever come to fruition, or maybe they will but it won’t be for many years. Whatever the case, I guess we’ll just have to wait and see. However let me be very clear that the United credit card example (and all the others mentioned) were purely hypothetical scenarios. Don’t worry, as stated above I have never heard of anyone receiving a 1099 for a credit card bonus. At least not yet!
Related articles
- Is Interest on Credit Cards Tax Deductible? (turbotax.intuit.com)
- Citibank Claims Awards of Frequent Flyer Miles Are Taxable (lawprofessors.typepad.com)
- Credit Q&A: Are Rewards Points Taxable? (thestreet.com)
- Which Credit Card Rewards Does the IRS Care About? (dailyfinance.com)
© 2012, Bruce Mc. All rights reserved.
