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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Debt BLAG says
I also don’t think they’ll ever be taxed either, but don’t think it’s too far from reality that they could be. The tax code is already pretty well set up for in-kind income
Harry Campbell says
Yea if anything they might tax them at the cash back redemption rate which is often much lower than what you can get with airline/hotel redemptions. That would be a bummer but not the end of the world 🙂
moneystepper says
Wow — thanks for the advice. I had no idea that the bank bonuses were taxable.
Harry Campbell says
Yea it’s a nice little surprise for most people at the end of the year 🙂 Luckily, the bank bonuses are usually pretty small compared to the credit card bonuses of $500 or more.
Tara @ Streets Ahead Living says
you want to know why credit card bonuses will never be taxed? Congress and the Senate fly back and forth like crazy from DC to their homes and pay for hotels and other misc expenses while on the job, equaling big points/miles for the politician.
The Congress and the Senate would NEVER vote to remove those perks from themselves!
Harry Campbell says
Yea I don’t think loyalty rewards(Points and miles for hotel stays or airline flights) will ever be taxed either. But it’s very possible that sign up bonuses will be. They already do it with bank/checking bonuses so it’s not that far fetched that they would do the same thing with cc bonuses.
Daniel says
Just another reason to love credit card rewards. I remember signing up for a bank account and being surprised with another 1099 at the end of the year that reduced my tax refund. That’s no fun!
Harry Campbell says
Yea it’s been fun to see all the PF bloggers getting in on the travel churning game this past year. I don’t know how much longer it will all last but might as well take advantage of free money while it lasts 🙂
Bryce @ Save and Conquer says
I’ve never received a 1099-INT for a bonus for opening a bank account, but the amount was only $25 and I’ve only done it once.
Harry Campbell says
That’s weird, I thought all banks send out 1099’s for checking/savings bonuses as I’ve gotten them from Chase, Citi and Sharebuilder. Either way, free money is nice. Although it is ‘up to you to report the bonus still’ haha.
Kevin @ Credit Bureau Insider says
I believe the IRS requirement is that a 1099 must be sent out anytime the annual income is $600 or greater. Banks are free to send them for any amount so you just never know. Plus, with the advent of electronic filing the costs of printing and mailing these statements has dramatically dropped.
Harry Campbell says
That’s exactly right Kevin. The IRS requirement is to send a 1099 if you make more than $600 but it’s completely up to the bank/company to send out the 1099. I made less than $600 from about 10 different sources last year and received a 1099 only from Citi, Chase and Sharebuilder so who knows? haha
I do know the paypal requirement is somehow higher though. If you receive $20,000 in payments(goods & services) AND have 200 transactions you will receive a 1099.
Adam says
I didn’t know that the credit cards rewards weren’t taxable. I’ve never thought about it and never received one. I have received a 1099 from the bank though. Last year I opened a new account and received a bonus and got a 1099 for the amount as an interest payment. It was still worth it though.
Harry Campbell says
Yea bud, my marginal tax rate is around 40% so I’m always looking for tax free income. Things like credit card bonuses are amazing since you can take 100,000 miles and get two business class tickets worth thousands from Istanbul to LAX(that’s my return leg from my honeymoon this summer!). So not only am I getting the flights for free but I also don’t have to spend my after tax dollars on it.
pepe says
Just because the bank issuing the credit card doesn’t send you a 1099 form, it doesn’t mean the signup bonuses are not taxable. I’d be surprised if the IRS doesn’t point this out during a tax audit.
Harry Campbell says
Use Google much? haha jk. The IRS considers credit card bonuses/rewards as a discount, not income. Loopholes rock!