(Originally posted on 8/19/2016) This website is all about credit card, bank bonuses and class action rebates. You get 10-15 bank bonuses a year, 250K-300K points/miles on a few credit cards, a few hundred in class action rebates, some other freebies that we might post and then you calculate your net earnings at year’s end.
Come January, 1099s tax statements start coming in the mail and you realize that you have to pay taxes on some of those bonuses that you received during the previous year.
Now that’s a headache. I don’t know about you, but I never paid attention in income tax class. So, I reached out to my friend, Romeo, who also happens to be a talented tax accountant working for one of the big CPA firms in NYC. In return for his time, I offered to buy him a drink at his favorite spot: Gregory’s Coffee.
After we got our cups of java, I asked him straight forward: “Romeo, what counts as taxable income? Most of our readers receive cash for opening bank accounts, cash for credit card bonuses, miles and points and even miles from bank accounts. How come some are taxed and some others are tax free? There are is a lot of discussion in the blogosphere, but there are no definite answers out there. Please enlighten me and my readers!”.
After taking a big sip of his mocha latte, and fixing his high-end fashion glasses, Romeo explained:
“The simplest way to figure out if you should pay taxes is to define if you received a “rebate” or a “reward”. The reason you usually pay taxes on bank bonuses is because they usually are rewards or interest income. In most bank account offers you’ll see in the fine print that you will receive Form 1099-INT at the end of the year. This is the same form you receive when you earn interest on an interest-bearing account, such as a savings or money market account. The simple rule to follow is, if you do receive a 1099, REPORT IT!.
Miles on the other end are not considered “rewards” for tax purposes as far as IRS is concerned. In fact, IRS doesn’t have any specific guidelines on miles and points earned from credit card sign ups. One reason is that these points don’t have a fixed value. One UR points might be worth one cent, two cents or it might have no value at all if it was never used and you lose them when you close your accounts. Hence, the general rule for credit card bonuses is: DO NOT REPORT IT.”
As Romeo pauses, I took a look at my notes and things started becoming much clearer. That’s easy I thought. I like following rules and guidelines. And then it hit me! What about the exception rules, such as when you think you should have received a 1099 but you didn’t, does it mean you don’t owe taxes?
Romeo looked at me and said:” I knew you were going to ask that. That’s an excellent question. Sometimes you might notice that a bank didn’t send you a 1099 tax statement in January. This doesn’t mean that you do not owe taxes on the reward you received from that bank. It’s ultimately your responsibility to report everything to the IRS, even if you don’t receive a 1099. So using the differentiation explained above, you (or your accountant) should report that income on your tax return.
In fact, you should be organized and keep a list of all bonuses that you receive. Some banks might not send you a 1099 tax statement and some others might just make it available online for you to download and print.”
As I was getting ready to thank Romeo for his valuable insight, he jumped and said: “But wait, there is an exception”. Taxes and Exceptions? I let Romeo preach on. And preach on he did.
“Remember when I told you the general rule to not credit card rewards if you dont receive a 1099 tax documents? Now ponder this: what if you receive a 1099 tax document? Do you have to report it as income. Well, the first thing you should do is not ignore it.
In fact, if you receive a 1099, you have to list it when you file your tax return in order to avoid a mismatch with the reported income that the bank filed with IRS. But if it’s not taxable, you could deduct it as a rebate showing a net taxable income of $0.
Here’s a scenario, try to keep up. Let’s say I signed up for three MLB cards from Bank Of America as you mentioned last week. Each one of them comes with a $200 bonus after spending $500. Based on what we explained so far, you wouldn’t have to pay any taxes. But let’s say you also open a Bank Of America checking account for another $100 sign up bonus. Then you deposit the $600 you earned from your three credit cards, into your checking account, since that will earn you an extra 10%, or $60. Bank Of America will now probably send you a 1099 for the total, since it involves a bank “reward” and it’s over $600.
Does this mean that you lose out by having to pay tax on the $600? No, that’s not the case. As Romeo mentioned above, if it’s not taxable, you could deduct it as a rebate, after listing the 1099 you received. You should only pay tax on the $100 you received as a checking account bonus and the $60 you received as a 10% relationship bonus. Deduct the $600 as a rebate.
One choice is to not show it at all. Just leave it out. The other choice is to report it as “other income” on Form 1040 line 21, with a corresponding negative entry to cancel it out. The second will probably be the best option to avoid a mismatch.”
This was enough tax lesson in a day for me. I thanked Romeo for his time and offered to treat him with another cup of coffee. But Romeo would have none of it.”It’s my turn to thank you for all the amazing deals advice that you give in your blog”.
Have any more questions regarding this topic? Ask in the comments below, and I’ll get Romeo to answer, although it will probably cost me some more java.