Quick Tip: Differences Between Bank and Credit Card Sign-up Bonuses
Just a quick tip that a reader brought up… when you receive a “bonus” from a bank, it is usually going to be reported as taxable interest income to the IRS via a 1099-INT form. Since such interest is taxed as ordinary income, you should remember that you will probably owe income tax on the bonus amount multiplied by your marginal tax rate (2010). After personal exemptions and standard deductions, students or other people with lower incomes might find that they don’t owe tax anyway, but it’s still worth noting.
Another way that this can get messy is if the bank offers an item like an mp3 player, and reports the full retail value while the actual market price is much lower. Let’s say they give you an iPod that you can find for $200 but mark it as worth $300. If you’re in the 28% tax bracket, you’ll be paying $84 in taxes for that “free” iPod. Still a good deal, but only if you would really pay that much for it! (Example: iPod Touch from KeyBank.)
However, incentives from a credit card sign-up are usually non-taxable. They don’t report any income on 1099-INTs, and due to a IRS private-letter ruling, tax experts tend to view the bonuses as a rebate on the purchases you make on the cards. (Example: $500 cash bonus from credit cards.)
[Insert "The More You Know" theme song...]
Find more in Banking, Credit Cards | 5/20/10, 3:00am | Trackback
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May 20th, 2010 at 9:59 am
I realized this too, not coincidentally around mid-April. A word of caution on the graphic though;
Knowledge = Power and
Power Corrupts
You are participating in a pro-corruption campaign. Careful with that.
May 20th, 2010 at 11:13 am
I called my bank, Wells Fargo, and they said that they do not report this as income.
May 20th, 2010 at 12:09 pm
@Tony – Which promotion, and for what size bonus? Out of all the bank bonuses I’ve done, only two did not report it as income on a 1099, and that was back in 2005 or earlier.
May 20th, 2010 at 1:27 pm
@Jonathan – I currently have a Wells Fargo Rewards Card. It is nothing special but they don’t have reward limits. I know cards out there where you need to spend a certain min/max amount before you earn full point per dollar spent. Also the rewards gift cards are mostly 1 for 1 unlike many other rewards programs. ie. I can get a $15 Amazon GC for 1500 pts.
May 20th, 2010 at 2:33 pm
@Tony – Ah, I thought you were talking about a bank bonus promotion. Your experience then matches mine, that credit cards don’t report rewards as income.
May 21st, 2010 at 3:34 am
[...] the form of a cash, an item of value, and so on. The problem is that you need to be careful because signup bonus from banks are usually taxable whereas those from credit cards aren’t. Not only that, but the taxes are calculated on the retail value and not the actual market price, [...]
May 21st, 2010 at 1:50 pm
Jonathan, you wrote, “…they don’t owe tax anyway, but it’s still worth nothing” but I suspect you meant “it’s still worth noting.” Otherwise if it was worth nothing, I wouldn’t bother trying out this technique! =]
May 21st, 2010 at 4:53 pm
@Kenneth – Fixed
May 22nd, 2010 at 2:21 am
[...] Via mymoneyblog. com [...]
May 23rd, 2010 at 8:14 pm
Lets say a person is enrolled in a ThankYouNetwork via Citicards bonus points, and they receive points to get gift cards for gas and retail purchases (i.e Best Buy gift cards) , does that need to be reported?
May 24th, 2010 at 6:25 pm
@sa – Nope. not under what the IRS private ruling letter says. I don’t.
May 27th, 2010 at 6:32 am
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