It always seems as though each tax season brings new surprises. Recently, a stir was caused when Citibank issued 1099 forms for bonus miles paid out to new customers. Because Citi valued each of its airline miles at 2.5 cents, the 25,000-mile bonus worked out to more than $600 in value.
According to IRS rules, that means a 1099 has to be issued. Citi reported that as income to the IRS, and that means that taxpayers receiving the bonus also had to report it – or risk an audit when the numbers didn’t match up.
Do You Pay TAxes On Credit Card Rewards?
In most cases, you won’t have to pay taxes on credit card rewards. First of all, few of us earn enough rewards for them to be valuable enough to be reported on a 1099 form (although, technically, you are supposed to report all income to the IRS, even if you aren’t issued forms). But there is also a difference in how various credit card rewards are viewed:
- For promotions like the Citi promotion, where you receive a large amount of points for signing up, the reward is seen as similar to a financial windfall. And, they aren’t seen as a true gift, since they were made for promotional purposes.
- Regular travel rewards and miles earned by using your credit card, though, are seen more like rebates. So the tax situation is a little bit different.
Related: Spotting The Best Frequent Flyer Rewards Programs
It’s also worth noting that part of this reporting issue comes because Citi valued its miles higher. By valuing them at 2 cents apiece, they wouldn’t have had to report on the 1099 form, and the IRS would be none the wiser (although that doesn’t let you off the hook for reporting your income).
What about Cash Bonuses?
Realize though, that cash bonuses are viewed as income. After all, these windfalls are promotional in nature, and they come right to you. The IRS expects you to report them, even if the bank doesn’t. Most of the cash bonuses are $100, $250, or $300, and don’t trigger the reporting requirement on behalf of banks.
Related: Best Cash Back Credit Cards
The IRS, though, still expects you to be honest, even though the agency hasn’t been too aggressive about running down cash bonuses and credit card rewards in the past. Even if the banks aren’t reporting the bonuses, you are supposed to take the initiative and report them on your tax return.
Of course, there is a chance that the IRS won’t find out, since the banks aren’t sending in the 1099 forms. You have to decide whether you would rather be safe than sorry in this case.