If you are earning bank bonuses, you need to understand the tax implications. The good news is that it is not complicated. The key distinction is between bank account bonuses (taxable) and credit card sign-up bonuses (generally not taxable). Here is what you need to know.
Bank Bonuses: Taxable as Interest Income
Bank account bonuses are treated as interest income by the IRS. When a bank pays you $300 for opening a checking account and meeting certain requirements, that $300 is taxable income, just like the interest you earn on a savings account.
Banks are required to report bonus payments over $600 on a 1099-INT or 1099-MISC form. You will receive this form in January or February of the year following the bonus payment. However, even if the bonus is under $600 and you do not receive a form, you are still legally required to report it.
Credit Card Bonuses: Generally Not Taxable
Credit card sign-up bonuses are typically not considered taxable income. The IRS views them as rebates on purchases rather than income. When you spend $4,000 to earn a $750 bonus, the IRS treats that bonus as a discount on your spending rather than income earned.
This applies to points, miles, and cash back earned through credit card spending. There is no 1099 form for these, and they are not reported as income.
What About Referral Bonuses?
Referral bonuses from credit card companies (like earning 20,000 points for referring a friend) fall into a gray area. Some tax professionals consider these taxable since they are not tied to spending. Others argue they are still rebates. In practice, issuers rarely send 1099 forms for referral bonuses, but some do for large amounts. Track what you receive and discuss with your tax advisor.
Tracking for Tax Season
The simplest approach is to keep a record of every bank bonus you earn, the amount, and the date it was paid out. When tax season arrives, compare your records against any 1099 forms you receive. If you earned bonuses that are not reflected on a 1099, report them anyway.
Churning Hub helps with this by tracking bonus amounts and payout dates. You can filter by "Paid" status and "Bank" type to quickly pull up everything you earned in a given year.
How Much Tax Will You Actually Pay?
Bank bonuses are taxed at your ordinary income tax rate. If you are in the 22% federal bracket and earn $3,000 in bank bonuses, you will owe roughly $660 in federal taxes (plus state taxes if applicable). Even after taxes, the bonus is still free money. A $300 bonus that costs you $66 in taxes still nets you $234 for opening a bank account.
State Taxes
Most states tax bank bonus income the same way they tax interest income. If your state has an income tax, expect to owe state tax on your bonuses as well. States with no income tax (Texas, Florida, Nevada, and others) obviously have no state tax on bonuses.
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