I know I’m not covering new territory here, but January is a little depressing – right? I mean, it’s cold, the holidays are over, your football team has probably already been eliminated from Super Bowl contention (ok – not you, Patriots fans), and did I mention that it’s cold?
It’s also the time those credit card bills start to show up from all that December spending. Maybe it’s time to redeem those credit card points or miles you’ve been saving up and jump on a plane headed someplace warm. How about Miami, or maybe Maui? Sounds exciting, right?!
Well, before you start clearing your calendar, think about this – redeeming those points or claiming your rewards may be a taxable event. Yes, I know it’s surprising, but the IRS looks everywhere when it comes to finding opportunities to collect revenue.
Ok, now that I’ve interrupted your daydreams of sipping a tropical drink on a beach somewhere, let’s consider several issues and strategies that can save you big time:
Some common examples of credit card rewards that do not need to be reported as income are cash-back programs, travel miles bonuses, accumulated points towards future purchases, and credit card sign-up bonuses that require a financial transaction, such as making a purchase, to be realized.
Anything you receive that isn’t tied to actual use of the card, whether it’s cash, airline miles, tangible goods, Super Bowl tickets, or anything else, is going to be considered taxable income. And because banks and credit card companies don’t like running afoul of the IRS, you can count on receiving a 1099-MISC tax form in the mail for the value of bonus. If you don’t like running afoul of the IRS, you will in turn report that income when you file your personal tax return.
Bottom line, if you are simply redeeming miles or points, you aren’t going to be taxed on the value and should be skipping to the ticket counter. However, with that being said, don’t ignore a 1099-MISC, if your credit card company or bank sends you one in the mail.
If you don’t understand why you received the 1099, call your credit card company. If it turns out to be legit, then report the income and pay the taxes. Following this procedure will help you prevent a small annoyance (potentially paying taxes on a few hundred extra dollars in income) into a much bigger problem (an omission that you have to explain later to the IRS during audit).
The NEBDG Blog, by our Tax & Legal instructor Mark J. Kohler, is "The Real Estate Investment Conversation You Can Rely On." Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the books “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. Let us know if there is a topic you would like to discuss!