I have two personalities when it comes to credit card rewards. As an industry analyst, the perspective is “get them while you can because the industry model will not be able to support them over the long haul.” As a consumer, I say, “bring them on” and I will find ways to maximize my return-on-points. My last big haul was in 2016 when I harvested my points and too a trip to London with my wife, with free airfare and hotel to London for a week. Thank you, American Express and Chase! Even through the points were great for us and valued at more than $3,000, I assure you these two top issuers made plenty of transaction fees on us.
The New York Times reports on the IRS’ position on credit card rewards. Simply put, things appear safe right now, but as taxation goes, there might be upcoming risk. The issue centers around whether points are awarded for doing something, verus points awarded for making purchases.
- Whether rewards or bonuses are taxable depends on whether they are tied to spending on the card, tax experts say. If you get cash back or rewards from a credit card in exchange for buying things with the card, the Internal Revenue Service generally doesn’t consider the rewards taxable, said Donald Zidik, a certified public accountant at Waldron H. Rand & Company, near Boston.
- If, for instance, you earn 2 percent cash back for the amount you spend, or earn 5,000 bonus points or frequent flier miles if you spend a certain amount of money within three months of opening the card account, that’s not taxable. “It’s considered more of a rebate or discount,” Mr. Zidik said.
- But if you earn a reward or bonus for simply opening an account — or referring a friend who opens a new account — that amount is considered to be taxable. Hence, the tax forms some consumers are receiving.
So the distinction is clear (for now). Earning points through card usage appears to be a rebate; earning points for doing something, like a referral triggers a tax event.
- American Express has sent 1099-MISC forms to cardholders, with copies to the I.R.S., if they earned $600 or more in total value for referral bonuses in 2018, said a spokeswoman, Heather Norton. She said the company discloses in the terms of its offer that the value of a referral bonus may be taxable income.
- “The value of the Referral Bonus may be taxable income to you, and we may be required to send you a Form 1099-MISC and file it with the I.R.S.,” reads a notice for an offer attached to the American Express Gold Delta SkyMiles card, for example.
- Mary Jane Rogers, a spokeswoman for Chase, says that issuing 1099-MISC forms isn’t new. The forms reflect payments for items like referral bonuses, which are given to customers who refer a friend to Chase, or a bonus for customers who sign up for paperless bank statements.
- In Chase’s case, she said, the forms are likely getting attention from customers because the bank made errors in calculating the amounts on a “few thousand” forms and had to reissue them.
- At Discover, card holders who earned $600 or more on “nontransactional” rewards are sent 1099-MISC tax forms, said a spokesman, Derek Cuculich. Those include rewards for referring a friend, a one-time cash back “match” bonus given to new cardholders and the “good grades” program, which offers statement credits of $20 a year to holders of its student card if they maintain a grade-point average of 3.0 or higher.
My view to the New York Times:
- Assigning a cash value to rewards points or frequent flier miles is a bit of a gray area since the value of points can vary depending on how the cardholder redeems them. But a value of 1 cent per point is common, said Brian Riley, director of the credit advisory service at Mercator Advisory Group. At a penny a point, 500 points would equal $5.
- “It’s definitely a disincentive,” Mr. Riley at Mercator said. Although the amounts involved may be relatively small, he said, you still have to pay attention to forms that are filed with the I.R.S., to avoid potential penalties or interest for underreporting income.
In short, routine point earnings are great; start taxing them and it takes all the fun out of it!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group