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Will Credit Card Rewards Soon Be Classified as Taxable Income?


What’s considered taxable income?

Airport waiting room with passenger shadow

Just about anything you can think of, according to this list on the IRS website.

However one thing you will find notably absent are credit card rewards. At least for now, but will that soon change?

The reason credit card rewards have typically not been counted as taxable income is because they are viewed as a rebate.

For example, if you spend $100 with a card that gives 1% cash back, the $1 you receive is merely a rebate on the money you spent.

That’s the same reason why manufacturer mail-in-rebates aren’t counted as taxable income, either.

Both scenarios are usually viewed as price adjustments, not income or free money.

What has the IRS previously said about this?

Not much has been officially published about the tax treatment of credit card rewards. Perhaps the closest thing was a private letter ruling (here is the PDF) from 2012 which stated:

…the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.

You may breathe a sigh of relief reading that, but the paragraph underneath it could be cause for concern:

This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes.

Does that mean converting miles to cash back might create a tax liability?

While the aforementioned letter was only applicable to one private tax situation, these types of rulings are generally considered to be a clue as to what the IRS is thinking.

Whatever the case, that little snippet of a clue is over ten years old. Since then a lot has changed in the credit card world.

Most notably, the signup bonuses have gotten significantly larger.

Back then, you would be lucky to get $50 and now, it’s possible to score up to $500 or more.

There have even been some targeted mail offers for the American Express Gold which gave 50,000 points (if converted to miles, that possibly would yield a value of over a thousand dollars).

The 5% cash back cards like Discover It and Chase Freedom didn’t exist back then, either.

With more at stake, is there now more incentive to tax?

Some issuers may now be taking a different stance

In 2013, Bank of America began including this statement in the fine print on some of their credit card applications:

The value of this reward may constitute taxable income to you. You may be issued an Internal Revenue Service Form 1099 (or other appropriate form) to you that reflects the value of such reward. Please consult your tax advisor, as neither Bank of America, its affiliates, nor their employees provide tax advice.

The vagueness of saying “you may be issued” a 1099 – without saying under what circumstances – has led to a great deal of speculation on CreditCardForum.

Some members theorize they may only issue 1099’s if the rewards redeemed during the year are $600 or more in value (since a 1099 is required for prizes and awards of $600 or greater).

However with Bank of America remaining mum on the subject – and their phone reps not knowing the answer – it looks like we will just have to wait and find out.

But if they’re handling it the same way as Citi’s ThankYou Rewards program (which most Citi credit cards participate in) then the $600 threshold will be the trigger. Per Citi’s website:

Value of rewards from redeemed points may be reported to the IRS as miscellaneous income to the ThankYou Member on Form 1099-MISC in the year redeemed, if the value of the rewards is $600 or greater or the value of the rewards plus other taxable miscellaneous income awards received from Citibank, N.A., is in the aggregate $600 or greater for a calendar year, as required by applicable law. ThankYou Member is responsible for any taxes.

Meanwhile, with travel rewards, the value isn’t as clear cut.

As we all know, due to blackout dates and other restrictions, the actual value you get from your frequent flyer miles can vary greatly, depending on how and when you redeem them.

Although it didn’t involve credit cards, in 2011 Citibank ran a promotion for new bank accounts. A limited number of customers received a bonus of 25,000 American Airlines AAdvantage miles.

Much to their surprise, at the end of the year they received 1099’s which assigned a $600 cash value to the bonus (that’s almost 2.5 cents per mile).

At least two customers have sued Citibank for this, alleging this information was not disclosed upfront and that the assigned value per mile was inflated.

One can only imagine how messy it will get if the whole industry starts treating miles as taxable income.

How are consumers responding?

Since Bank of America and Citi have added that language, a number of posters on CreditCardForum and other forums have stated they will no longer be applying for their cards.

Instead they will be opting for American Express, Capital One, Discover, and other issuers who don’t have that 1099 language, or at least not yet.

Others who already have Bank of America and Citi cards have mentioned they will stop using their accounts in a given year before the rewards tally hits $600.

But something to keep in mind is that taxpayers are required to declare all income, even that which is below $600.

Therefore if these rewards are indeed taxable income, it will still need to be declared, even if a 1099 form isn’t provided.

Do your credit cards state any of the above language? Will you continue to use it? Would love to hear your thoughts below in the comments.

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Photo credit: Alex E. Proimos via photopin cc

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