Credit Card News: Shopping

Because credit card rewards, even the ones that aren't straight cash back perks, have monetary value, does that mean consumers must pay taxes on them? According to the Internal Revenue Service, the answer depends on how the rewards were obtained.

Any rewards doled out as a bonus for opening up a new bank account, for instance, count as income and may be subjected to taxation. If the value of such rewards total $600 or more, the bank that issued them must mail out 1099 tax form to both the recipient of the rewards and the IRS. Citibank, in fact, has been busy sending 1099-INT forms to eligible checking and savings account customers who earned over 25,000 American Airlines miles over the past year as a bonus through new account recruitment initiatives. Citi reported that each mile has a value of 2.5 cents.

However, rewards earned the “traditional” way, via making purchases with a rewards program credit card, are tax-free. This is because these types of rewards, cash back and others, are categorized by the IRS as a discount on the price of the goods and services purchased – much like a coupon.

"Rewards and airline miles that are provided in connection with a purchase on a credit card are routinely not subject to individual income tax reporting," said a spokeswoman from Citibank, Emily Collins, in an e-mailed statement, according to one online news source.

The mandatory reporting threshold for the IRS is $600, which is why reward point bonuses have not heretofore often been subjected to taxation. However, as competition amongst credit card issuers grew stiff throughout the past year, lenders were continually upping the ante in their efforts to lure new, creditworthy customers into opening up a credit card account by offering them enticing bonuses simply for signing on.

The IRS is always coming up with new ways to prevent Americans from underreporting their income, which creates what is known as a tax gap. The tax gap is the difference that exists between the amount that is owed and the actual amount that is paid. According to the IRS, 82% of the tax gap is due to taxpayers underreporting their income.

In their efforts to decrease the instances of underreported income, the IRS is introducing a new tax form this year, the 1099-K, which will affect individuals who sell goods or services online and receive credit card payments via PayPal or similar merchant accounts.