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Which Credit Card Rewards Does the IRS Care About?


citibank irsCitigroup's (C) Citibank recently sent recipients of a special frequent flier mile promotion an unwelcome surprise: a 1099 tax form indicating those bonus miles have been reported to the IRS as income.

Even if you weren't part of that promotion, it's reasonable to wonder whether the frequent flier miles or other credit card rewards you collect are going to cost you, too, come tax time.

The answer appears to be no. The two scenarios are different.

  • In the taxable promotion, Citibank was seeking new customers and those who opened new accounts received 25,000 miles as a reward.
  • In contrast, the regular miles and rewards that we accumulate over time are due to our using our debit or credit cards.

In other words, the former is more akin to a financial gift, while the latter is considered a rebate earned by the customer.

Following in Oprah's Footsteps

This issue is only recently rearing its ugly head because sign-up prizes haven't generally been big enough to trigger reporting. Recent banking reforms, though, have caused banks to see the revenue they were used to collecting from hefty fees for overdrafts, late payments, and debit-card swipes shrink. As a result, they've been shifting their focus and are now competing aggressively for new customers.

In the case of Citibank's rewards, it valued each mile as worth 2.5 cents, so a 25,000-mile reward was worth $625, and therefore the bank deemed it reportable as taxable income. Thus, Citibank was simply following the IRS' rules, which require the reporting of prizes or awards valued at $600 or more.

The concept of gifts being taxable isn't a new one. In an article at CreditCards.com, Connie Prater offered the famous example of Oprah Winfrey giving those in the audience at one of her show's tapings a free car. That was a thrilling surprise windfall for the lucky attendees, but it caused problems for some, too, as the value of the cars was considered taxable income. If you suddenly receive a $25,000 car, you might find that you have to cough up $6,000 in taxes. You'll still come out ahead, but you'll face a cash crisis if your bank account isn't flush.

Rewards the IRS Usually Ignores

While sizable gifts from banks can indeed be considered taxable income, the rewards that banks give you based on your credit or debit card usage are generally not taxable -- and generally don't even need to be reported to the IRS.

Citibank spokeswoman Emily Collins has explained, "Rewards and airline miles that are provided in connection with a purchase on a credit card are routinely not subject to individual income tax reporting."

Getting a reward for opening a new account can still be a non-event, tax-wise, if the reward isn't worth $600 or more. A Wells Fargo (WFC) spokeswoman noted that her company's recent giveaway for new accounts was a stuffed animal.

The Big Picture

It's important not only to understand what is and isn't taxable, but also to remember that the world of tax rules is a fluid one. Rules change over time. Indeed, already, Sen. Sherrod Brown (D-Ohio) has called on Citibank to stop treating the frequent flier miles as income. Whether the bank will stop -- or even whether it can, given IRS rules -- remains to be seen.

When it comes to IRS regulations, it's best to follow them -- they're not optional. One area in which Citibank does seem to have some discretion is in how it values its miles. If it valued each mile at $0.02 instead of $0.025, the value of 25,000 miles would have been $500, not $625, and wouldn't have crossed the $600 threshold.

Until further notice, taxpayers who collect rewards for credit- or debit-card use should follow the rules, resting easy about their purchase-related rewards and preparing to report any sizable gifts from banks.

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. You can follow Selena on Twitter @SelenaMaranjian. Click here to see her holdings and a short bio. The Motley Fool owns shares of Citigroup.

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Our government worries about the few pennies the people get by these so called miles and perks that we get from the credit companies but the don't look to see how much interest we pay to the banks each and every month. We can't deduct that interest anymore but the banks get so many perks from the government that its greed want every dime from the people.

February 11 2012 at 10:08 PM Report abuse +1 rate up rate down Reply
Don Horner

So you get screwed by the banks and the IRS.

February 11 2012 at 9:55 PM Report abuse +1 rate up rate down Reply

What would Timothy Geithner do?

Woops??? You mean I should have reported that income?!?!

February 11 2012 at 2:59 PM Report abuse +4 rate up rate down Reply
1 reply to Mike's comment

It's OK, Geithner is one of Obama's guys. He doesn't need to comply with the laws.

February 11 2012 at 3:08 PM Report abuse +3 rate up rate down Reply

If the IRS wasn't collecting money for the federal government they would be investigated by them under the RICO Act.

February 11 2012 at 1:27 PM Report abuse +2 rate up rate down Reply

If they are going to tax rewards, they should let us deduct interest paid on credit cards.

February 11 2012 at 12:57 PM Report abuse +9 rate up rate down Reply
1 reply to ruler777's comment

The deduction for consumer interst was eliminated under the revsions to the tax code in 1986. Besides credit card debt, it also eliminated the deduction for interest paid on student loans.

February 11 2012 at 3:50 PM Report abuse rate up rate down Reply
2 replies to Kent's comment
Denise Bickle EA

Interest paid on student loans is deductible unless you make too much money to use the credit.

February 11 2012 at 9:41 PM Report abuse rate up rate down
Denise Bickle EA

Interest paid on student loans is deductible unless you make too much money to use the credit.

February 11 2012 at 9:42 PM Report abuse rate up rate down

Yep, got a 1099DIV for the $125 I got for opening a Chase Checking Account. But in defense of Chase, they did write in the small print that it would be a taxable event.

February 11 2012 at 12:26 PM Report abuse rate up rate down Reply

We got $100 credit on our account for opening a checking account with Chase. Come tax time, they sent a 1099 and showed it as interest income! Seems to me it should not have been taxed at all, it's under $500 and it was a gift given for opening an account and had nothing to do with interest. Every little bit helps, so this just burns me up!

February 11 2012 at 12:00 PM Report abuse +2 rate up rate down Reply
2 replies to sjsew's comment

Stop your complaining. I won a contest with my airline's frequent flyer program, winning several hundred thousand miles. The effect to my taxable income was as if my incentive bonus was double.

February 11 2012 at 3:55 PM Report abuse rate up rate down Reply
1 reply to Kent's comment

Stop your complaining. If sjsew can't complain then you can't either.

February 11 2012 at 6:13 PM Report abuse rate up rate down
Denise Bickle EA

Chase is only required to send a 1099 if it is more than $600. However, you still have the responsibility to claim ALL income, no matter how small on your tax return.

February 11 2012 at 9:42 PM Report abuse rate up rate down Reply

If one cannot write off interest on credit card debt anymore, then one should not have to report incentives either. Then you wonder why Americans feel the need to hide their cash overseas. (You can't go to Canada because it is against Canadian law for Americans to have Canadian bank accounts).

You are taxed 50% right off the bat and get $25 Million.

IF you take the cash option, we go back to the $50 Million (which is now 25) and they take out another 15%($7.5 Million) which leaves you with $17.5 Million. Next year you file your income taxes and they tell you that you still have too much.

You take annuity payments on the $25 Million over 26 years leaves you with $961,358. per year.
Better hope you don't die for if you do, the government takes the balance. Your family doesn't get a nickle.
When you win the lottery, right off the bat they take half. Then you are

February 11 2012 at 10:33 AM Report abuse +4 rate up rate down Reply
2 replies to quixmar's comment

Actually, the so called "50% right off the bat" is not tax.

To win a lottery that would offer a $50M jackpot, you have two choices: Take it as an annuity over X amount of years and get taxed appropriately. At the end of X amount of time, you've received probably closer to $35-38M (after taxes). To accept a lump sum, you are really accepting the principal amount that would trigger the $50M over X amount of years and be taxed accordingly. Lump sum of $25M - 30% would leave approximately $17.5M. To make a blanket statement of "50% right off the bat" is not only misleading, but wrong.

February 11 2012 at 5:29 PM Report abuse rate up rate down Reply
1 reply to sleezyscoundrel's comment

If I won50M, and they took half, I would try to buck up and struggle through!

February 11 2012 at 5:57 PM Report abuse rate up rate down

you really need to read up on the lottery rules- you are way off and the balance of the 30 year payment plan can be included in your will

February 11 2012 at 7:49 PM Report abuse rate up rate down Reply

This article conflicts with IRS rules. The rules state that all gifts must be reported- there is no minimum amount. Example: I won a $500 gift certificate to a store. I thought I would not have to report it because it was less than $600 and also the company sent me no tax form. But I read the IRS rules and discovered I did indeed need to report it.

February 11 2012 at 9:39 AM Report abuse +2 rate up rate down Reply
2 replies to Daniel's comment

alot of that is pretty much on the honor system--if I win 200.00 on lottery they just give me the cash--no ID required

February 11 2012 at 7:51 PM Report abuse rate up rate down Reply

You may have to report it, but that doesn't mean it is taxed.

February 23 2012 at 4:28 PM Report abuse rate up rate down Reply

Dumb Ohio congresswoman: It's not up to the bank to determine if it's taxable or not, it's up to the IRS. The bank was just following the current IRS rules. If Congress wants to help, they should be simplifying the tax code which reduces the need for the IRS. Unfortunately, many in Congress aren't that smart.

February 11 2012 at 8:44 AM Report abuse +6 rate up rate down Reply
1 reply to ccdae5's comment

Ron Paul is looking to eliminate the IRS. From his website - As President, Ron Paul will support a Liberty Amendment to the Constitution to abolish the income and death taxes. And he will be proud to be the one who finally turns off the lights at the IRS for good.

Capital gains taxes, which punish you for success (and interfere with your efforts to hedge against inflation by purchasing gold and silver coins), should also be immediately repealed.

Struggling college students and those working to support their families would be greatly benefited and receive an immediate pay raise by eliminating taxes on tips

February 11 2012 at 3:55 PM Report abuse +2 rate up rate down Reply