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September 3, 2014


Citibank Sends Form 1099 for Bank Rewards Programs

Most banks have some type of customer loyalty points program where you earn a certain number of points based on dollars charged each month. In some cases, the bank may offer a certain number of points for opening an account.

When you convert the points into a new television or an airline ticket, is it a taxable event? A recent tax court decision says it is appropriate for banks to send out 1099s reflecting the value of the merchandise redeemed, because the amount is taxable income.

The taxpayer in the case received 50,000 thank you points from Citibank for opening an account. He used the points to purchase a plane ticket. Citibank sent the taxpayer Form 1099 with the value of the ticket listed as $668. The taxpayer argued that this amount was not taxable.

In its decision on the tax appeal, the Tax Court found that points were somewhat like interest on a saving account. The bank was providing a premium for using the taxpayer’s money. The value of the ticket in the case was therefore taxable income.

Adding to the complexity of reward programs, frequent flyer miles are different. In exchange for flying, the customer is earning value that he or she can use for additional flights. This means that award travel is not taxable income.

What about miles accumulated from business travel? Is a personal plane ticket purchased with business miles taxable income? No, in Announcement 2002-18, the Internal Revenue Service clarified that it would not treat business travel miles used for personal travel as taxable income.

This example shows how minor differences can affect tax treatment. In any IRS tax audit it is important to seek the representation of an experienced tax attorney in dealing with the agency.

Source: Forbes, “Tax Court Says Bank ‘Thank You’ Points Are Taxable Income,” Tony Nitti, August 28, 2014.