This is considered taxable income?
Just about anything you can think of, in this list on the IRS website.
But one thing you will find are notably absent credit card rewards. At least for now, but that will change soon?
The reason credit rewards cards generally have been considered taxable income because they are considered recoverable.
For example, if you spend $ 100 with a card that gives 1% cash back on $ 1 you receive is simply a discount on the money you've spent.
This is the same reason the discounts mail manufacturer are not counted as taxable income, either.
both scenarios are generally regarded as price adjustments, no income or free money
What the IRS previously said about this?
Not much was officially released on the tax treatment of credit card rewards. Perhaps the closest thing was a private letter ruling (PDF here) from 2012, which stated:
... the IRS will not assert that any taxpayer in its federal tax liability due to the receipt or personal use of frequent flyer miles or other benefits in promotional attributable to the taxpayer's business or official travel.
You can breathe a sigh of relief reading, but the paragraph below it could be the cause of concern:
This relief does not apply to travel or other promotional benefits that are converted into cash, the remuneration paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for purposes of tax evasion.
is what it means to convert miles to cash back could create a tax liability?
Although the above letter was applicable to private fiscal situation, these types of decisions are usually considered a clue as to what the IRS thinks.
whatever the case, this small excerpt of an index is over ten years. Since then, many things have changed in the credit card world.
Specifically, the registration bonus got much bigger.
At the time, you'd be lucky to get $ 50 and now it is possible to mark up to $ 500 or more.
There have even been targeted mail offers for Gold American Express gave 50,000 points (if converted into miles, which can give a value of over a thousand dollars).
The discount of 5% return cards like Discover and Chase Freedom did not exist at the time, either.
With more at stake, is it now more incentive to tax?
some issuers may now be taking a different position
in 2013, Bank of America began to include this statement in the small print on some of their credit card applications:
the value of the award may be taxable to you. You will receive an Internal Revenue Service Form 1099 (or any other appropriate form) for you that reflects the value of this award. Please consult your tax advisor or as Bank of America, its affiliates, or employees provide tax advice
The vagueness of saying "you can be issued" 1099 - . Without saying under what circumstances - has led to much speculation about CreditCardForum
Some members theorize they may issue in 1099 if the rewards redeemed during the year are $ 0 or more in value (. since 1099 is needed for awards and prizes of $ 0 or more)
However, with Bank of America remains silent on the subject -. and telephone representatives who do not know the answer -. it seems we'll have to wait and find out
But if they are handling the same way ThankYou Citi rewards program (which most Citi credit cards participate in), then the $ 0 threshold will be trigger. By Citi website
Value of traded rewards points can be reported to the IRS as miscellaneous income in ThankYou Member on the 1099-MISC in the year redeemed, if the value awards is $ 0 or more, or the value of rewards and other miscellaneous income taxable rewards received from Citibank, NA, is a total of $ 0 or more in a calendar year, as required by applicable law . ThankYou member is responsible for all taxes.
Meanwhile with travel rewards, the value is not as clear.
As we all know, due to blackout dates and other restrictions, the real value you get from your frequent flyer miles may vary considerably, depending on how and when you redeem.
Although it was not on credit cards in 2011 Citibank has launched a promotion for new bank accounts. A limited number of customers received a bonus of 25,000 American Airlines AAdvantage miles.
To their surprise, at the end of the year, they received in 1099 which awarded a $ 0 cash premium (which is around 2.5 cents per mile).
at least two clients have sued Citibank for this, alleging that information was not disclosed in advance and that the value attributed by mile was inflated.
one can not imagine how messy it will get if the whole industry begins processing miles as taxable income.
How consumers responded?
Since Bank of America and Citi added that language, a number of posters on CreditCardForum and other forums have said they will no longer apply for their cards.
instead, they will opt for American Express, Capital One, Discover, and other issuers that have only 1.099 language, or at least not yet.
others who already have Bank of America and Citi cards indicated that they stop using their accounts in a given year before the award count reaches $ 0.
But something to keep in mind is that taxpayers are required to report all income, even that which is below $ 0.
so if these rewards are income taxable, it will still need to be declared, even if 1099 is not provided.
Do your credit cards declare any language above? Will you continue to use Would love to hear your thoughts below in the comments
Photo credit:. Alex E. Proimos via photopin cc
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