Now that my favorite time of the year(tax time!) is right around the corner, I’m starting to get a lot of 1099′s in the mail. I have many sources of income which usually means a lot of 1099′s showing up on my door step. It’s more work for me but it’s usually a good thing since it also means I made a lot of money last year. When I started going after credit card sign up bonuses a few years ago I wasn’t really sure how sign-up bonuses would be taxed. But now that I’ve been doing it for a while I know exactly what you have to pay taxes on and what you don’t.
Banking Bonuses are Taxable
Although not as lucrative, bank bonuses are very common these days. I’m sure you’ve seen advertisements offering $50-$200 for opening a new checking account with Chase or 20,000 bonus points for opening an account with Citi. The only problem with these bonuses is that they are considered an interest payment by the IRS so you will receive a 1099-INT and have to pay taxes on them. So if you got $200 for opening a new account, don’t spend it on something frivolous because eventually you’re going to have to pay taxes on that bonus.
Credit Card Bonuses are Still Not Taxable
Even though I go after credit card bonuses more as a hobby than anything else, I can’t deny the fact that there’s a lot of money in it. I’m getting anywhere from $500-$1,500 worth of value every single time I sign up for a new card. And the nicest part about these bonuses is they are completely tax free. Credit card companies don’t have to issue 1099′s on bonus miles, points or even cash.
Since the United States uses a progressive tax system, there’s actually a disincentive to earn more since the more you make the more you pay in taxes. That can really suck for someone like me in the 25% federal tax bracket because I have to pay taxes at my marginal rate of close to 40% on every dollar I make over my annual salary. So anytime you’re making a decent salary and you can find a way to make money tax free you should take full advantage of it.
Card Bonuses Won’t Ever Be Taxable
I’m going to make a bold prediction here and say that card bonuses won’t ever be taxable. Since most cards give out bonuses in the form of points or miles, there’s no way to accurately determine the value of a bonus mile or a bonus point. Most credit card companies allow you to redeem points for flights, hotels, gift cards, etc and each redemption option has a different point value. Generally you’ll get a much worse redemption rate on a gift card for example than an airplane ticket so there’s no simple way to quantify the value of a point.
I usually strive for a redemption value of 1-2 cents per point. So my 50,000 point sign up bonus will be worth anywhere from $500-$1,000 depending on how I redeem the points. If you’re really crafty, you can get even better redemption rates but I think a 2 cents per point redemption rate is pretty respectable.
Readers, what do you think about getting credit card bonuses that are tax free? Have you ever thought about the fact that additional hours you work are taxed at your marginal tax rate?
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-Harry @ PF Pro