Do You Have To Pay Taxes On Bank Account Bonuses?

Although CreditCardForum normally doesn’t feature guest posts, I was recently asked by a reader about paying taxes on checking account signup bonuses. I asked my friend Dan, founder of BankVibe, for the answer and he offered to write a post about it. Without further ado, here’s his answer:

All of you bank deal hunters have probably noticed that the second have of 2011 hasn’t been quite as lucrative as what we saw earlier this year (and even more so in 2010). While credit card deals have certainly been competitive throughout the year, we’ve seen a major dip in the number of checking account promotions and bonuses.

Usually when the economy is strong, or at least stable, banks will attempt to attract new customers by dangling a number of bonuses and incentives in front of them for opening new accounts. In 2009 and 2010 we saw the competition heat up on this front with the largest banks in the country offering anywhere from $50 and $150 just for signing up and funding an account.

Unfortunately for the consumer however, whenever “free” money is involved, Uncle Sam always wants his cut.

Paying Taxes on Bank Bonuses

Unlike credit card rewards, you will have to pay taxes on bonuses associated with new bank accounts (be it checking accounts or certificates of deposit). This applies to both cash bonuses and gifts. They may not make it extremely clear with the offer, but it’s always embedded somewhere in the fine print. Most banks will issue a 1099-INT for the cash bonus and if the bonus happens to be a product they’ll issue the same form for the retail value of the item. The exact amount of taxes you’ll need to pay on your reward isn’t always consistent though because the 1099-INT is essentially treated as bank interest. So the amount you’ll own Uncle Sam is entirely based on your individual income tax rate.

When dealing with a non-cash bonus, timing and your method of valuing the reward can be tricky, but if done correctly may allow you to pay less than you might think. One important thing to note is that if the 1099 comes in higher than the retail value at the time the prize was given to you AND you can document that fact, you can then claim the lesser value. For this to work, however, it is essential that you note the retail value of the item at the time it’s given to you and not months after later when the tax form comes in. Some of our readers have also suggested claiming the retail value of non-cash items based on what they could purchase them for on EBay. While this is clever, it wont always work as the company whose partnering with the bank is generally issuing the 1099-MISC or 1099-INT themselves and therefor will set the retail price. You could try contacting them to show proof of a cheaper price, then have them reissue the form with a new assessed value of the reward, but in our opinion it’s probably not worth the hassle.

If you’re looking to avoid paying taxes altogether on checking account bonuses, you may want to review Perkstreet’s cash back checking account. They’ve attempted (and in our opinion done a fairly good job) of meshing the cash back structure associated with popular credit cards to a checking account and debit card. Right now they’re offering 5% cash back on rotating categories up to $250 per year, followed by a promotional 2% cash back for all items during your first 3 months, and then 1% cash back on everything else after the promotional period is over.

Have you paid taxes on a bank deal in the past or know of an outstanding offer available today? If so, tell us about it by leaving a comment!

 
Comments
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I am wondering the same thing about nationwide bank bonus. I have 200 incentive bonus + .04 interest lol so $200.04

I got $200 for opening checking account with Nationwide bank. I have not received 1099-INT and when I check with bank, they replied the bonus amount will not appear in 1099-INT and asked me to consult with tax advisor. Does it mean that if bank is not issuing 1099-INT, then it is not reported to IRS and it is not required to pay tax ?

I have this situation with PNC Bank. Because there was no minimum balance requirement associated with my new account bonus, PNC has the option to treat it as a payment for services rather than as interest. If my bonus had been $600 or more, PNC would have been required to send me a 1099-MISC. It wasn’t, so PNC isn’t, and it opted not to. Ergo, I received neither a 1099-INT nor a 1099-MISC, and my bonus was not reported to the IRS.