In late 2011 Citigroup ran a special frequent flier promotion. In early 2012 the card issuer mailed those who participated in the program a bonus surprise…a 1099. Turns out those bonus miles were considered taxable income by Uncle Sam and his strong arm unit, the IRS. That begs the question; ”are other credit card rewards taxable?”
Usually, the answer is no. The program mentioned here was intended to garner new customers, so Citigroup issued 25,000 miles for new accounts. The lump sum reward was enough to be considered a financial gift, triggering the need for the 1099; whereas, usual rewards are too small and are considered a rebate. Rebate status keeps the IRS dogs off your back.
The issue with Citibank came about because the lender deemed each mile worth 2.5 cents. With 25,000 miles being given away, the value of the gift was worth $625. The IRS requires a 1099 for anything exceeding $600. The problem was mainly in Citigroup’s valuation of the miles.
While most credit card rewards are not taxable, this scenario is a lesson in researching which reward offerings are actually worth taking advantage of. Your best defense against an unexpected 1099 is to research every possible aspect of a new credit card.
Unexpected taxable income is nothing. For instance, many don’t realize that the forgiven debt resulting from a debt settlement in Aberdeen, WA, or anywhere else can be taxed as income by the IRS.