Bank of America Rewards taxable?

[mattsd13]

Hello, longtime lurker and this is my first post here as I don't know anyone who can answer this question for me.

The reason I am stressing over this is due to my wife and I maxing out our 401ks this year to get our earned income down to 26k.  We have two kids so qualifying us for a nice Earned income credit.  If the below is true it will put us over the 3400 investment income limit for the credit and will lose the credit.

Scenario:

The question is in regards redeeming BOFA credit card reward dollars into a BOFA checking account (when this is done you receive a 10% bonus on the transfer---a perk from BOFA).  You can also redeem for statement credit or they can just mail you a check.

 The question was posed on a different online forum stating that a BOFA representative informed them if they did redeem reward dollars to a BOFA checking account the entire amount is taxable.  Example transfer 200 dollars and get a 20 dollar bonus = 220 dollars taxable/interest.

To my knowledge, rewards generated by credit spending are viewed by the IRS as non taxable rewards (rebates) and bonuses tied to checking and savings accounts interest and therefore taxable.

What also has me confused is that only my wife has BOFA checking account so we funnel our rewards to her account to get the 10% bonus and you can do this from a different card account name.  The rewards would be earned under one individual and then taxed under another? 

I have contacted BOFA twice to get clarification on this and received two completely different answers.  One saying yes taxable interest and the other saying no.  To me, I would say only the 10% bonus is what is taxable, not the full amount.

Has anyone else ran into this with BOFA and redeeming rewards to their checking?  If a bank sends you a 1099 that you feel is incorrect is they a way to fight/change it or is it set in stone?

Any help be greatly appreciated.

[seattlecyclone]

Yes, everything I've read suggests that credit card rewards tied to spending are considered discounts on purchased goods, not income. That doesn't necessarily mean that your bank won't report it as interest anyway. If they do, it would be on you to prove to the IRS that the bank erred in generating a 1099 for that amount. Consider doing a statement credit instead, or simply waiting until January 1 to redeem the rewards to avoid all doubt.

[Cathy]

... it would be on you to prove to the IRS that the bank erred in generating a 1099 for that amount.

This is incorrect. In fact, the Internal Revenue Code ("IRC") says the exact opposite (subject to certain conditions):

[I]f a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed ... by a third party and the taxpayer has fully cooperated with the Secretary ..., the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

IRC § 6201(d) (emphasis mine).


I express no view on the substantive tax issues raised in this thread, although I reiterate that the taxability of amounts received is determined by the provisions of the Internal Revenue Code, not by Bank of America.

[seattlecyclone]

Sure, if it gets to court the IRS will have to prove that the income is in fact income. If you want to challenge it that far, be my guest. But if you wish to avoid court entirely, you'll need to convince whichever IRS agent you're working with that you're right and the giant bank is wrong. I'm sure you're aware that's what I meant and you just want to follow your standard pattern of being technically correct without answering any of the questions presented by the original poster.

[Cathy]

I sometimes do directly answer a question that somebody posts, but I generally only do so if all of the following criteria are satisfied:

• the question can be, and is, stated in an abstract and self-contained way, such that the answer can fairly be described as general information;
• the question is a "pure" question of law, does not depend on specific facts, and is entirely extricable from the situation of the person who asked the question;
• the answer to the question is not reasonably subject to significant debate;
• the issues raised by the question are interesting;
• I feel that I am able to answer the question correctly, subject always to any hedging language present in the answer; and
  
• I feel that my answer will be appreciated.

If any of these criteria are unsatisfied, the best policy in my opinion is not to answer the questions posed by the original post.

In the present thread, not many of those criteria are satisfied, but even if all criteria are satisfied, I still obviously have discretion about whether to answer questions. I might draw your attention to the fact that in several recent threads, on May 12, 2016 and September 17, 2016, where I did directly answer a question (because of all the criteria were satisfied), the person who asked the question did not even bother to thank me.

[mattsd13]

I really appreciate the responses, thank you.
 
In hindsight I would have just done a statement credit vs depositing into the BOFA account and forgone all of this.  But whats done is done.  Im not expecting any type of professional tax advice here, but if one received a 1099 for all rewards redeemed(and feel its incorrect) how would they even go about challenging that?  Contacting the IRS directly? BOFA? What is the chance  an IRS agent would allow for these changes?  If I receive a 1099 is it pretty much a moot point?

I could really care less if this Earned Income Credit wasn't involved.  It wouldn't be worth my time.  However, I'm expecting the credit to be near 6000 dollars.  Thats my concern.

Thanks

[Cathy]

First, regarding the substantive issue: It doesn't matter whether the amount is received as a statement credit or as a deposit to a bank account. See Rev Rul 76-96, where it was held that a rebate is not included in income even though paid as a separate cash payment. I've attached a PDF of that ruling because I can't find a free version online. That ruling was later suspended in part, but the later suspensions are not relevant to the issue under discussion here so we don't need to go into that.

Note that I am not saying that the credit card reward is nontaxable. I am just saying that whether it is taxable or not is not going to depend on whether it was received as a statement credit or not. The form of payment just doesn't matter here.

As for whether the reward is nontaxable, the IRS has accepted in a private letter ruling, PLR-141607-09, that a 1% credit card reward constituted an adjustment to the purchase price of the item and was therefore nontaxable. Unfortunately, private letter rulings are not precedent and cannot be relied on by other taxpayers. 26 USC § 6110(k)(3). The private letter ruling gives a hint as to how the IRS might view your case, but it is important to understand that the IRS is generally not bound by its dealings with other taxpayers, and it might come to a different decision in your case even if the situation is completely identical. See United States v. Mendoza, 464 US 154, 161 (1984) (noting that the US government is free to take different positions in cases involving different parties even if the issues are identical).

I express no view on the ultimate issue of whether the amount is taxable.

As for any potential Form 1099: It basically doesn't matter what the Form 1099 says. The taxability of the amount is determined by applying the law, not by reading a Form 1099. That said, if you receive a Form 1099 and you disagree with what is stated on it, you can write a letter to Bank of America and ask them to change it, but you are not required to take this step. You also have the option of suing Bank of America under 26 USC § 7434(a) if you believe that they "willfully file[d] a fraudulent" Form 1099, but again, you are not required to take this step and it is not relevant to whether you owe the tax. I express no view on whether such a lawsuit is merited or whether it would be successful.

If you determine that the amount is nontaxable but is included in the Form 1099 anyway, you are not bound by the Form 1099, and you can just take the position on your return that the amount is nontaxable by not including it in your income. Again, I stress that I am not commenting on whether the amount is nontaxable, but if it is nontaxable, you don't have to include it in your income, even if it is included on a Form 1099.

If you file a paper tax return, you can attach a written statement explaining why you are not including an amount that was included in the Form 1099. If you do this, the IRS might not ever contact you about the discrepancy and might just accept your explanation. On the other hand, they might disagree. We can't predict which will happen, and I offer no view on that.

[JoJo]

Just one data point for a similar situation:  My credit union pays out rewards at the end of the year based on different criteria (direct deposit, amount in the account, etc).  These rewards are deposited into the account and are taxable.  But in my case, they are usually small amounts (like $50).

[mattsd13]

Cathy, thank you so much for a deep response I appreciate it.

[arebelspy]

I might draw your attention to the fact that in several recent threads ... September 17, 2016, where I did directly answer a question (because of all the criteria were satisfied), the person who asked the question did not even bother to thank me.

Huh? That Sept 17 thread, the reply directly under yours (from the OP) is "Thank you for the detailed response Cathy."

And then he asked how you did your research, to which you replied, and he answered again "thank you for taking the time to write the original answer and follow up to my query."

[arebelspy]

The question is in regards redeeming BOFA credit card reward dollars into a BOFA checking account (when this is done you receive a 10% bonus on the transfer---a perk from BOFA).  You can also redeem for statement credit or they can just mail you a check.

This is what I've found.

For your situation, where you're so close to a tax cliff, I wouldn't risk it for a 10% bonus on such a small amount.  Have them mail you a check, or get a statement credit, and forgo an extra 10% (which would really bump your cash back from like 2% to 2.2%).

For most situations I'd say take the bonus, pay the tax if they issue a 1099.  For you, not worth the risk (and/or having to fight with the IRS about it).

[Cathy]

I might draw your attention to the fact that in several recent threads ... September 17, 2016, where I did directly answer a question (because of all the criteria were satisfied), the person who asked the question did not even bother to thank me.

Huh? That Sept 17 thread, the reply directly under yours (from the OP) is "Thank you for the detailed response Cathy."

And then he asked how you did your research, to which you replied, and he answered again "thank you for taking the time to write the original answer and follow up to my query."

         

Here is the order of events disclosed by the timestamps on the posts:

• I wrote my first response in that other thread on September 17, 2016.
• Twenty days later (on October 7, 2016), I posted the reply in this thread where I said that "the person who asked the question did not even bother to thank me". As of that date, the claim was true because there had been no activity after my first post in the other thread.
• The earlier thread then received further activity on October 16, 2016 (after my reply in this thread) and October 18, 2016.

In other words, my post in this thread was true as of the date it was posted. In general, the statements in my posts are intended to apply as of the date that the post is written, as disclosed by the timestamps on the post. I do not systematically update my previous posts if there are later developments relevant to the post.

[arebelspy]

I see.

[DavidAnnArbor]

I've never received a 1099 for the credit card 2% rewards from my Fidelity American Express credit card so I'm pretty sure credit card rewards are not taxable as has already been implied by Cathy (private letter ruling gives you a sense of the IRS thinking on this issue).
Regarding the 10% bonus for depositing a credit card reward into the bank - that I don't really know.

[mmm8190]

I've received the same % bonus from B of A in the past and I am pretty sure nothing was reported to the IRS by the bank. 

[ajc]

mattsd13 - did you receive any 1099 for redeeming BOFA credit card reward dollars into a BOFA checking account? Thanks.   

[ShadowRegent]

I've been redeeming credit card rewards from BofA into a BofA checking account for quite some time-- never received a 1099.  Same with every other credit card issuer that I've dealt with.  Credit card rewards regardless of how they're redeemed have never resulted in a 1099 as they're considered a rebate.  Bank account bonuses, non-IRA brokerage bonuses, all do result in a 1099 (assuming the value is high enough) and are taxable.

[ajc]

Thank you, ShadowRegent. No 1099 even for 10% extra bonus for redeeming credit card rewards from BofA into a BofA checking account?

[ShadowRegent]

No, and I have Platinum Honors so it's a 75% bonus.  My understanding is that it's still considered a rebate since it's based off of credit card spending (how you actually receive that rebate isn't relevant).

[ajc]

Thank you so much, ShadowRegent!

[swampwiz]

I was given $50 for opening up an account at Discover Bank, and I got a 1099 for it.

[topshot]

I wonder if this is related to a 1099-MISC (in letter form) we just got from US Bank. It says nothing of what the income was or the amount but lists for Box 4 that they withheld $5 for federal income tax. This card is a rewards card we've used for many years and the rewards are store checks we can use for groceries.