By Sara Rathner | NerdWallet
Thanks to travel rewards credit cards, you summer like a celebrity for the cost of a staycation, and your friends are starting to notice. There's no reason to gatekeep your travel secrets — the more friends know about how to earn valuable rewards, the more who will join you on epic and deeply discounted adventures.
Not only do you take the time to answer their credit card questions, but you also send referral links if you carry a card they're interested in applying for. If they end up getting a card with your referral, they can earn a generous sign-up bonus by meeting the card's spending requirement, and you get "paid" for your time and expertise by getting a referral bonus.
But there might be a catch. That referral bonus can come with a tax bill.
How the IRS looks at credit card rewards
You may owe taxes on some credit card rewards, depending on how you earn them and the dollar value of what you redeem.
"If you have to spend money for it — for example, you get a bonus after spending $3,000 within a certain time frame — then, it's not taxable," Luis F. Rosa, a certified financial planner and enrolled agent in Las Vegas, said in an email. "However, if no money was spent and it was just an incentive, then, the income is taxable."
According to the IRS, rewards earned through spending count as rebates, which aren't taxable. But you don't have to spend anything to earn a referral bonus, so it's potentially taxable, especially if you earned at least $600 in value.
Credit card issuers' fine print spells this out, though some issuers provide more information than others. Citibank's terms and conditions are quite specific, stating that you may owe taxes on rewards in the year in which you redeemed them, and Citibank determines the value of those rewards. Chase and American Express also include language on taxes in their terms and conditions, but it's more vague, basically stating that you may earn taxable income and, if so, you're responsible for the tax liability.
If any of your credit card rewards earnings meet the qualifications to count as taxable, you'll receive a 1099-MISC form from your card issuer, which will contain information to include on your tax return. Rosa says that even if your earnings from referral bonuses amount to less than $600 and you don't receive a 1099-MISC, you should still report those earnings to the IRS.
When in doubt, consult a tax professional for guidance on your specific situation.
Should you refer friends for credit card offers?
Any taxes you may have to pay will, of course, be a percentage of the value of the bonus. So it may still be worth it to you to refer friends and deal with the sting of a slight increase to your taxable income later on.
There is another instance, however, where you might want to hold off for the sake of your friendship. Sometimes a card's welcome offer is larger if you apply through the card's website or at a bank branch location. In cases where your referral yields a smaller bonus for your friend, the decent thing to do would be to steer them toward the bigger bonus.
Sure, you won't get that financial incentive, but you'll win your friend's respect and avoid potential taxation.
Sara Rathner writes for NerdWallet. Email: srathner@nerdwallet.com. Twitter: @sarakrathner.
The article The Hidden Cost of Helping Friends Earn More Credit Card Rewards originally appeared on NerdWallet.
No comments:
Post a Comment