With the tax season in full swing, some consumers are being ambushed by tax burdens related to the many bonuses and rewards doled out by banks. Because these rewards come in various forms, it may be confusing to assess which rewards are considered taxable income.

Some taxpayers are hitting a wall when they received a tax form (Form 1099-INT) for the value of miles awarded to them for opening a bank account.

As reported in this LA Times piece and in an active discussion on the FlyerTalk forums, Citibank customers were startled by letters saying that they have to pay taxes on the thousands of airline miles they received for opening a checking and savings account package.

The consumer advocate would be quick to side with customers who believe that there are no taxes due for these rewards miles. Despite the lack of detailed tax reporting rules by the Internal Revenue Service, it is likely that these customers would be responsible for these taxes.

According to IRS Publication 550:

Gifts for opening account. If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest.

For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.”

Banks will mention that taxes are reported on the awarded amounts in the fine print.

For example, GiftsforBanking rewards customers with certain gifts when a certificate of deposit is opened. These gifts vary by term and deposit amount. Customers can get a 32” HDTV by opening a $10,000 5-year CD. And, in the fine print it says, “A 1099-INT statement for the value of the gift (including applicable sales taxes, shipping and handling costs) will be issued.”

Others would point out that there are no such tax reporting requirements involved with cash back and rewards bonuses on credit card accounts. However, card issuers do not note the tax burden in the fine print of applications.

These credit card bonuses are based on spending, so they are considered rebates.

Currently, the popular cash back Chase Freedom® card is awarding $150 cash back to new customers only if they spending $500 in the first 3 months. It’s not considered taxable income.

However, with a new Chase Total Checking account, customers can get a $125 cash bonus after depositing $100 within 60 days of opening. Chase will send a Form 1099-INT for this bonus.

The difference is slightly puzzling but still discernible.

Ongoing Benefits Ignored

At the risk of giving the IRS any ideas, there is a major dead zone regarding the taxing of ongoing account perks.

Many airline cards, such as the United Mileage Plus card, offer free complimentary airport lounge passes and free checked bags. Other cards such as the Southwest Airlines Rapid Rewards Plus credit card offer annual anniversary bonus points.

The IRS does not address the tax burden on these perks.

Again, since these cards often come with annual fees, these benefits can be considered “purchases”.

What do you believe should be the rules governing bank bonuses and rewards?

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  • Sunshine25

    > The difference is slightly puzzling but still discernible.

    If you receive a bonus by parking your money in a checking or savings account, I think it is perfectly reasonable to issue a 1099. You did not have to spend any money for this, so this is clearly income to some degree. It seems wrong to value 1 point as 2.5 cents though. How did they arrive at that valuation? If I redeem 40,000 points for cash, would that not be $400.00? It is not like I get $625.00 for 40,000 points?

    If you have to make purchases on your credit card for the reward, I would consider it a “rebate”. If you bought a $100 item and received a $2 rebate, your total cost is $98.

    • Valuation is definitely a grey area when it comes to miles and points – as there are many factors to consider.

      For some cards, 1 point does not necessarily equate to 1 cent (which has been a common standard). 

      Airline membership rewards programs have such a confusing redemption format that it certainly disrupts any sensible attempt to place a dollar value on a mile. American Airlines require different amounts of miles for different seating classes, destinations, and travel dates. 

      The IRS states that banks have to report the cost basis – which may (just pulling this out of air) include costs to maintain these programs/partnerships with the airlines.

      Ultimately, it appears that the bank has the final say.

      • Sunshine25

        I think a simple rule for valuation is the least favorable redemption rate customers are given on bank’s redemption site. If a $25 rewards check requires 5,000 points, then the valuation 1 point is 0.5 cents. Alternatively, we can be fair with banks and make the ratio 1 to 1. Although I don’t know why we should be fair to the banks.