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Last week, some consumers began receiving IRS forms sent by their credit card lender, prompting a lot of concern about what benefits received as part of owning a rewards card were considered taxable. Now, the IRS has clarified its position.
Citibank’s decision to mail tax forms to some of its rewards cards customers certainly caused a stir last week, but now the IRS has come forward to make clear just what is and is not considered taxable under current codes. Essentially, consumers who received rewards points, miles or cash back just for opening a rewards account will have to pay taxes on the value of those benefits because it is considered “miscellaneous income.”
However, rewards points accrued in the course of normal credit card spending are not considered taxable because the IRS views them as rebates that help defray the cost of a purchase, rather than additional income.
“A common analogy is buying a $500 television at a retail store and receiving a $50 manufacturer’s rebate,” IRS spokeswoman Michelle Eldridge told the Los Angeles Times. “It’s not income, just a deemed reduction of the cost of the television.”
U.S. Sen. Sherrod Brown, an Ohio Democrat, who chairs the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, was unhappy about Citi’s decision to send the tax materials and contacted the bank asking it to stop treating these rewards as taxable income. However, Citi says it was just following tax law, because while smaller items with lesser values often go unreported, those that are more valuable are often reported by banks as a business expense, necessitating that consumers report them as well.
As for what the miles or points are valued at, Citi says that each one is worth about 2.5 cents apiece. So if a consumer received 10,000 for signing up, the value of that offer was $250. Meanwhile, Citi also claims that the tax implications of these offers was made clear in the materials given to borrowers when they were offered the accounts, though it was in fine print.
Many banks are now sending out offers for new rewards cards that grant consumers hundreds of dollars worth of miles just for signing up, then double that amount if they meet certain spending thresholds within the first few months the account is open.
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