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IRS Says Credit Card Sign-Up Bonuses are Taxable

Before you begin cursing the IRS for trying to dig even deeper into your pockets, let me make it clear that the tax law hasn't changed. Traditional rewards earned by making purchases with credit cards are still considered tax-free. You can rack up as many points as possible on your purchases without worrying about a 1099-MISC for the value of the rewards mysteriously showing up in the mail.

Sign-up bonuses for credit card accounts, on the other hand, have technically never been safe from the tax man. The value of a gift that's received when opening a new account, whether it be 50,000 points or a shiny set of new golf clubs, is generally considered reportable income by tax professionals. Has anyone been reporting it this way on their personal tax returns? I highly doubt it. Most credit issuers haven't been sending 1099 notices to the IRS or cardholders, and the IRS certainly hasn't been coming after anyone for underreporting a few hundred dollars in income from rewards credit cards.

If there is a case out there, I've never heard of it. However, Citi drew a lot of public attention to this issue last week when customers began reporting that they had received 1099 tax notices from Citi for sign-up bonuses valued above $600. In response to all the media hype around the issue, Michelle Eldridge, an IRS spokeswomen, was recently quoted saying "when frequent flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law." So there you go.

Sign-up bonuses can create a taxable event, but the catch is the IRS doesn't require banks to send a 1099 unless the amount is over $600. And since many sign-up bonuses fall under that threshold, I have a feeling a lot of underreporting of income will continue by taxpayers. The question that remains is will the IRS begin cracking down on this in the near future? For the sake of rewards credit card lovers that chase lucrative sign-up bonuses every year, let's hope not.

Have you received any 1099 notices from banks that provided you with sign-up bonuses last year? Also, if you don't receive a 1099 even though you were the recipient of a sign-up bonus, do you plan on reporting what you received as income on your tax returns? If so, how will you place a value on the rewards? I'd love to hear your comments below. Photo by JD Hancock

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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W.H.'s picture

Citibank never issued 1099s for credit card bonuses - they issued them for bonuses for bank accounts.

Joshua Heckathorn's picture

Good point W.H. Some of the initial reports I came across claimed otherwise, but it does appear that Citi has been sending out 1099s for bonuses that were awarded when customers opened up new bank accounts. I hope it stays that way.