Debit Card Bonus not taxable?

I did some further research into this and found the answer.

While most banks indeed regard sign-up bonuses for checking accounts to be a form of interest which they report on a 1099-INT, a few (like Capital One, apparently) consider this to be miscellaneous income, which they report on a

1099-MISC. And while the 1099-INT has a $10 threshold for reporting, the 1099-MISC evidently has a $600 threshold. So that's apparently why Capital One didn't send me anything.

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Either way, it's still taxable income.

Ira Smilovitz, EA Leonia, NJ

As a practical matter, what is likely to happen if the taxpayer doesn't report it? If CapitalOne doesn't issue a 1099, how would the IRS even know about the payment?

Understood. I was just focusing on why different banks seem to treat the same kind of bonus money differently. In the real world I can easily understand why many people who got a signup bonus of $100 or $200 a year earlier might honestly forget about it when it's time to do their taxes, if they aren't triggered by a 1099. These sign-up bonuses seem to have become increasingly more common the last few years.

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I don't think that it is. The bonus is tied to using the debit card in a specific fashion, not merely opening the account.

My understanding is that with credit cards a bonus tied merely to opening the credit card account is taxable income, but bonuses tied to use of the card are not.

You are correct about credit cards, but I think debit cards, which are tied to checking accounts, are treated differently. A credit card bonus that says use our card to spend $1500 over three months and we will give you $200 is non-taxable because the IRS considers the $200 to be a discount on money you have spent with the credit card.

But debit card use is simply a deduction from a checking account balances, and my experience is that an offer that says open a checking account with us and make debit card purchases (i.e., checking account withdrawals) totaling $1000 and we will deposit $200 into the account, is taxable. The issue in this case is whether the bank reports the income on a 1099-INT (which requires minimum earnings of $10) or 1099-MISC (minimum earnings of $600).

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It seems pretty clear that if the taxpayer doesn't report it and the IRS doesn't know about it, nothing will happen. It's like any other example where the IRS expects you to report income even if the IRS hasn't been notified of the income.

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You think wrong. IRC Section 61 defines gross income this way: "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, ..." So unless you can find where in the IRC this debit card bonus is specifically excluded from gross income, it's taxable.

Ira Smilovitz, EA Leonia, NJ

Would you also say that a credit card bonus is included gross income? If not, what is the distinction? The quote of Section 61 would appear to apply with equal force to credit cards as to debit cards.

Both may offer cash (or point equivalent) rewards as a percentage of net spending. Both may offer bonuses, also as a percentage of spending, e.g. a 40% reward such as $200 for spending $500 in a specified period of time.

See Citibank for an example of a debit card that pays point rewards as a percentage (1/3% or 1/2%) of monthly spending.

This piece from Covington & Burling LLP discusses a recent case, Anikeev v. Commissioner. In it, it the exclusion from income of 5% rebates on a credit card that was at issue. "The IRS has taken the position that rebates on the purchase of products and services do not constitute income to the customer who receives the rebate. Rather, as set forth in Revenue Ruling 76-96, the rebate acts as a discount on the product or service being purchased."

Yes, it would "appear" to apply. The problem is you can't extend exclusions to other items that may "appear" to be similar. It needs to be explicitly excluded. Such is the stuff that tax court cases are made of.

Ira Smilovitz, EA Leonia, NJ

For those who did not look up the Anikeev case, here are the facts - rather amazing/amusing!

"During these same years, the Anikeevs each held a Blue Card, which they used primarily to accumulate as many reward points as possible. To achieve this goal, the Anikeevs used their Blue Cards to purchase Visa gift cards, reloadable debit cards, and money orders. In 2013, the Anikeevs charged over $1.2 million for such items, and in 2014, they made charges totaling nearly $5.2 million. It appears that most of these purchases were for Visa gift cards. To maintain credit necessary to continue accumulating points, the Anikeevs would then use their Visa gift cards to purchase money orders, which they used to pay their American Express bills. The Anikeevs also appear to have used reloadable debit cards to pay their American Express bills. On some occasions, they also purchased money orders directly using their Blue Cards."

There is more to it than the IRC. The IRC says nothing about credit card bonuses, but the IRS has.

I appreciate the distinctions pointed out this thread. The only angle I can think of at this point is if the bank account bonuses might be treated as a reduction in bank account fees (Although why would anyone pay bank account fees? Why would anyone use a debit card? Well, I guess I have my way of doing things.)

Debit cards with cash back rewards, credit cards with cash back rewards, mail-in rebates and so on all serve to reduce the net purchase price of products and services. In this respect they are not merely similar but identical.

You are right to ask for the source "Rev. Rul. 76-96 ... is a key link in the chain of IRS reasoning on credit card rewards. ...

"... [IRS's] counsel said: 'And it's a long-standing IRS policy ... that card rewards are not taxable. And the rationale for that is that the reward itself acts as a discount on whatever property or services are being purchased by the consumer.'

"This policy reflects the recognition that a taxpayer who avails himself or herself of a discount in acquiring goods and services has no accession to wealth. That taxpayer has retained more of his or her wealth than a taxpayer who pays full price for the same good or service, but the taxpayer has no additional income, he or she simply has reduced consumption."

Reiterating - you ask the right question about where it says in Section

61 that debit card rewards are not included in gross income. Again I ask you, where in Section 61 is a distinction drawn between credit cards and debit cards? In the alternative, are credit card rewards also taxable and the IRS mistaken in its interpretation of the Code? [That wouldn't be the first time; the IRS had to clean up Rev. Rul. 96-76 in 2008 after courts repeatedly rejected its interpretation of the code on the seller side of transactions involving rebates; not at issue here. See bullet points here: ]

Interesting point: who is paying the credit card bonuses? The sellers, or the credit card company? Seems it is coming out of the fees charged by the credit card company to the seller. Likewise re debit card bonuses.

Regardless of what the tax code either explicitly or implicitly states, and regardless of what precedents may or may not have been set by the courts, the real bottom line is that few taxpayers are likely to report such bonuses as income unless they have received a 1099 (INT or MISC) showing the bonus as taxable income.

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There is one very common situation where the IRS should tax credit card benefits but doesn't. That is when a charge is made for a business purpose (often airline tickets), and the entire cost is deductible. The "rebate" has been deducted by the employer, so when the employee receives it, it should be taxable. But the last time I checked the IRS indicated that it would cause too much of an uproar, so they don't bother to try to tax those rebates.

Yes, that's correct.

The fees are absurd and most of them are noncompetitive.

Here are two articles that discuss them. Note that the fees are already out of date as they've gone up recently.

If that is their thinking, we need many more uproars.

I believe there's something a little more subtle going on here. The benefits inure to the payer of the goods or service, i.e. the employer.

Say an employee uses a business card to purchase a $1,000 ticket, which the employer pays for. And suppose there's a 2% reward ($20). Accounting for the rebate, the employer has paid a net $980 for the ticket as a business expense. But the employee grabs the "points" (or whatever). In effect, the employer has paid the employee the $20 benefit.

From the employer's perspective, it is out $1,000 either way - paying $1,000 for the ticket, or paying $980 for the ticket and $20 in employee benefits. From the employee and IRS perspective, the employee has gotten a taxable $20 benefit. Not because it was a credit card rebate, but because it was the employer's money which the employee received.

The IRS has said that this is too much of an administrative hassle to deal with. So until further notice it will not hold employees liable for getting these taxable employee benefits.