The Hidden Costs of Helping Friends Earn More Credit Card Rewards

Thanks to travel rewards credit cards, you can spend the summer like a celebrity for the cost of a staycation, and your friends are starting to take notice. There’s no reason to keep your travel secrets—the more friends you have who know how to earn valuable rewards, the more people will be willing to join you on your epic, deeply discounted adventures.

Not only will you take the time to answer their credit card questions, but you'll also send a referral link if you hold a credit card they're interested in applying for. If they end up getting a card through your recommendation, they can earn a generous sign-up bonus by meeting the card's spending requirements, and you can “pay” for your time and money by earning a referral bonus. expertise.

But there might be a problem. This referral bonus may come with a tax bill.

How the IRS views credit card rewards

You may have to pay taxes on some credit card rewards, depending on how you earn them and the dollar value of the rewards you redeem.

“If you have to spend money on it — for example, you get a bonus after you spend $3,000 within a certain time frame — then it’s not taxable,” said Louise, a certified financial planner and registered agent in Las Vegas. Luis F. Rosa said. “But if there's no money spent and it's just an incentive, then the income is taxable.”

Under IRS rules, rewards earned through spending are considered rebates and are not taxable. But it costs you nothing to receive the referral bonus, so it may be taxable, especially if you earn at least $600.

Credit card issuers' fine print spells this out, although some issuers provide more information than others. Citibank's terms and conditions are very specific, stating that you may owe taxes in the year you redeem your rewards, and that Citibank determines the value of those rewards. Chase and American Express' terms and conditions also contain language about taxes, but it's vaguer and basically says you may earn taxable income, and if so, you'll be liable for tax.

If any of your credit card rewards earnings qualify as taxable, you will receive a 1099-MISC form from your card-issuing bank with the information to include on your tax return. Even if your referral bonus income is less than $600 and you don't receive a 1099-MISC, you should still report it to the IRS, Rosa says.

When in doubt, consult a tax professional for guidance on your specific situation.

Should you recommend a credit card offer to a friend?

Of course, any taxes you may need to pay will be a percentage of the prize value. So it might still be worth it for you to refer a friend and deal with the pain of a slight increase in your taxable income later on.

However, there is another situation where you may want to hold off for the sake of friendship. Sometimes a card's welcome offer is larger if you apply through the card's website or at a bank branch. If your referral leads to a smaller bonus for your friend, the right thing to do is to lead them to a larger bonus.

Of course, you won't receive a financial incentive, but you will gain the respect of your friends and avoid potential taxes.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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