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How Are Credit Card Offers and Bank Promotions Taxed?

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Ryan, on my Invest With Only $100 Experiences & Some Thoughts On Life post, asks: “What are the tax considerations for the gains on these promotional bonuses. Say I receive a $100 bonus from a Bank of America account, and repeat this process 4 times in 2007, for a net gain of $400.” This led me to expand the question to include all those promotional offers and try to answer all of that in one shot.

Bank Promotional Offers

Bank promotional offers will almost always be considered interest and you’ll get a 1099-INT form in the mail – this will also almost always be indicated in the fine print for the promotional offer if you dig down deep enough. For example, ING Direct has a promotional offer where existing account holders can refer their friends. If the friend deposits $250, then the existing account holders earns $10 and the friend earns $25. When the transaction completes, the existing account holder will see that their “Interest Paid Year to Date” value will be $10 higher.

There are exceptions to the rule with bank promotional offers when it comes to product giveaways (a free toaster or an MP3 player) in that sometimes some banks will put the full retail value as earned interest and sometimes they won’t list it at all. I’ve had promotional offers of product where the product value was never reflected in a 1099-INT. When in doubt, as the institution as to what their policy is.

Credit Card Promotional Offers

These are the “get $100 statement credit after your first purchase” or “10,000 reward points after your first purchase” offers that have been popular as of late with credit card companies and these promotions are usually not considered income and thus aren’t taxed as income. You can treat these like cash back promotions, 5% cash back on purchases at gas stations and grocery stores, in that you aren’t “earning” money, you’re just billed less for purchases that you’ve made. In the past there has been discussion of considering the cash back as “income” but I think those discussions have pretty much died. So if your credit score can handle it, go get some free money from the credit cards.

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9 Responses to “How Are Credit Card Offers and Bank Promotions Taxed?”

  1. eROCK says:

    I always knew how the bank and incentives programs, but always wondered about the Credit Card promotions, interesting. One thing also to note … in my experiences, if the interest gained on any account is less than $10, you don’t need to report it.

    -Erich

  2. jim says:

    The bank is not required to report interest under $10 and tie it to an taxpayer identification number but you are still required to report it as interest on your return.

  3. samerwriter says:

    It’s not clear to me how the $100 back from the Citibank Credit Protector works. The explanation I’ve heard for the rebates is that rather than these being “income” they are just “decreased charges” for card use.

    But it doesn’t seem like that same explanation holds water for the credit protector thing.

    Of course it’s worth noting that just because one doesn’t receive a 1099-INT or 1099-MISC, it doesn’t mean the income is not taxable, it just means that the entity did not report the payment. If one knows the income should be taxable, he is still obliged to report it and pay taxes.

  4. David says:

    As far as putting this in perspective with your “Investing with $100″ post – most of those who would be investing with only $100 would be in a low tax bracket in the first place so they would be only losing out on a small amount of those bonuses to tax.

  5. MoneyMan says:

    I have seen a lot of posts by basically every personal finance blogger (what’s the count now, a million of us?) telling people to get $50 for signing up for this card, or $100 for signing up for this account etc… However, I think we need to be more responsible as a group when talking about this stuff. If you think of all the time a person spends opening a credit card account and dealing with the paperwork, cancelling the card after a trial period if need be, accounting for the tax implications, hurting their credit score, adding yet another username and password (and account to hack) to their digital empire… the benefits of a $50 account opening bonus are dwarfed by the administrative burden of having another account open.

    For a college student, $50 is a big deal. That will provide them with umpteen cases of Bush Lite. However, for most adults, a one-time $50 (which is only about $30 after taxes) bonus that leaves a legacy on your credit record is simply not worth the hassle. You would be better off taking 30-40 minutes sitting utterly still on your couch, listening to relaxing music, and meditating.

    Let your money serve you. Don’t become a slave to the $50 account opening bonus!

    If you were to list the 5 richest people you know and ask them how they got that way, I guarantee you they are not going to say it was the result of applying for credit cards and playing the balance transfer arbitrage game.

    That’s just my $0.02.

  6. jim says:

    While they didn’t get rich playing the balance transfer arbitrage game, some of the qualities of people doing the arbitrage (willing to take risks and try something new, willing to continue to educate themselves) are similar. Understanding and learning the system so you can use it to your advantage is what it’s about.

    I also think it’s a little foolish to think that what works for you will work for everyone. I don’t agree that I would be better off taking 30-40 minutes to listen to music on my couch, it may be what is refreshing and re-energizing to you but it’s not for me.

  7. MoneyFwd says:

    It’s good to know that the money/gift cards/whatever from points programs isn’t taxed.

    In response to MoneyMan, I’m in the 25% tax bracket and I have basically no money to invest at all. $100 is a lot to me at the moment, and that extra $50 can go a long way. Also since it’s not taxed, it’s well worth it. Compared to having $1000 in an ING account which would take over a year to gain $50 in interest and is also taxed.

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    Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: Consumerism Commentary has some thoughts on Quicken 2007. AllFinancialMatters lists 401k contribution limits for 2007. MightyBargainHunter wonders how much his …

  9. ApporamaMan says:

    $50 signup bonus were not worth it me at first, or so I thought. Now that I have it spreadsheeted and a system going it is well worth it. In fact the $50 signup bonus is woth $150/hours to me. It only takes me 20 min for setup, spend, payoff, spend again, pay off, retire card. The $100, $150, and $250 bonus are worth…well you can do the math.

    And now that I understand crecit utilization, credit scores, Balance Transfers, etc., every card I get is worth more than just sign up bonuses.

    Since 10/01/06 and this includes my wife we have in excess of $11,000 worth of signup bonuses, $1300 of that being cold hard cash (well, credit to credit cards). 100k Amex points–my wife enjoyed the $1000 in gap/banana republic cards. Without looking, I believe 450k+ frequent flyer miles (I value at .016/mile). Numerous Starpoints, Priorityclub points, marriot reward, etc., etc.

    So far $107,000 in BT. I figure these are worth minimum of $700/hour

    Credit Protector will make me over a $1000 for the year!!!!!!!!!!

    No, this is not for everyone. But if you are intelligent with your money, money smart, have a balanced checkbook, act as though it is cash and payoff immediately and only make $100/hour or less, have a little free time (instead of sitting on the couch, it is very much for you.

    ApporamaMan


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