Bonus points and cash back can be some of the best credit card deals around. But do those free rewards come at a price… in the form of a tax bill from Uncle Sam?
The answer depends on the card(s) you carry and the types of bonuses that you receive throughout the year. But the unfortunate news is that for many cardholders, the IRS is more than happy to take a cut of some promotional credit card bonus offers.
Here’s a look at which credit card bonuses are taxable, and the customers who are most likely to find a 1099 in their mailbox this year.
- Different Ways to Earn Bonuses -
Large credit card bonuses are different than your everyday credit card rewards. While there are requirements, you don’t have to earn them dollar-for-dollar with your daily spending. They usually aren’t offered more than once or twice over the course of your account, either.
Whether in the form of points, miles, or simple cash back – bonuses can be earned in a few different ways. The first one you’ll likely encounter is at sign-up.
Initial promotional offers are frequently offered to new cardholders, and typically come with a stipulation for earning, in the form of a minimum spend. Once you spend the required amount of money within the allotted timeframe, your account will be credited with a healthy bonus.
These bonuses can easily be worth hundreds of dollars, and are enticing enough that many customers will open an account for the sign-up bonus alone.
Lastly, you have referral bonuses. These bonuses are offered to cardholders in exchange for referring a new customer who opens a credit card with that issuer.
Different banks handle referral bonuses differently: some require your referrals to use a special link while others can just mention your name. Some issuers will offer referral bonuses in cash and others in points or miles, and some will limit the number of referral bonuses you can receive.
- Why Referral Bonuses Are Different -
When you spend money on a rewards credit card, you’ll earn cash back for qualifying purchases. When you meet a minimum spend requirement in the timeframe allowed, you’ll earn a welcome bonus. Both of these are actually categorized as rebates: you spend, and the issuer rewards you for said spending.
With a referral bonus, though, you don’t actually have to spend a penny. That makes this type of incentive a bit different, and in a category of its own.
Whether the referred person drops your name or uses a personalized link, there is no action required on your part to receive this bonus. In fact, you can earn referral bonuses – equating to hundreds of dollars in free rewards – without ever even using your credit card once.
Because of this, referral bonuses – and points won through a sweepstakes or contest, which you didn’t actually “earn” -- are fair game for IRS reporting. (As an aside, you could potentially encounter the same thing with savings and checking account bonuses.)
- What to Expect -
Historically, credit card issuers don’t bother reporting rewards earned through referral programs. In fact, while Citi sent out 1099s to select customers a few years back, it’s not something you see very often.
This year, though, some cardholders will be very surprised to find tax forms in their mailboxes. It seems that American Express has notified some customers that 1099s are on the way, for Membership Rewards and Starwood Preferred Guest referral bonuses received in 2018.
Amex hasn’t yet made a public statement about the tax reporting. However, cardholders who have already received their 1099 forms say that the card issuer valued Membership Rewards points and Starwood Preferred Guest at $0.01 each, and Hilton Honors points at $0.0067 each. Depending on how you redeem those points, you may find that this does or does not match up with your own valuation.
So, what does this mean for you if you’ve received a referral bonus on your credit card account in the last year? Well, the answer isn’t clear just yet. You may or may not receive a 1099 tax form, reporting those points as a form of income. If this happens, you might be able to dispute the posted value (saving yourself a bit on your tax bill), especially if you’ve redeemed points previously and found the rate to be much lower.
If you racked up your share of referral bonuses in 2018 and don’t receive a tax filing on them this year, congrats. While this type of IRS reporting still isn’t commonplace in the credit card world, it does beg the question: Are referral points worth it if you have to count them as income?