Chase Sending Out 1099s For Referral Bonuses

A couple of days ago I wrote about how Amex was sending out 1099s for points that were earned through their “refer a friend” program, and it looks like Chase is now doing the same.

To first recap the basics…

Are credit card rewards taxable?

The topic of taxation when it comes to points is an interesting one (let me say upfront that I’m not a tax professional, and this is just my take). As a general rule of thumb, airline miles, hotel points, and credit card points aren’t taxable. You’re only on the hook for taxes on points if they’re won as a prize (like if you win a sweepstakes), or if they’re an incentive that isn’t a rebate.

That last point can be confusing. Generally speaking credit card rewards are considered rebates, since you’re earning them for spending that you’re putting on credit cards.

However, when you earn a reward for referring someone to a credit card, arguably that’s an incentive that isn’t a rebate, since you don’t have to spend anything to earn that reward.

At the same time, historically credit card issuers haven’t sent out 1099s for these types of things, so the fact that they’re doing so now suggests they may have received some sort of guidance from the IRS.

Chase is sending out 1099s for referral bonuses

Chase has a “refer a friend” program, where you can earn bonus points for referring people to some of their cards. The program is a win-win, as it allows existing cardmembers to earn bonuses for referring friends to cards they like.

There are now reports that Chase is sending out 1099s for those who took part in the refer a friend program. Note that this doesn’t apply to welcome bonuses or rewards from spending, but rather just points from referrals. If you haven’t received a letter yet, expect that you’ll receive one soon.

To clarify two points that confused some people in the past (especially those outside the US who aren’t familiar with the US tax system):

  • The amount listed on your 1099 isn’t the amount you have to pay in taxes, but rather you have to declare that as additional income, so you’d pay at your tax rate based on that amount (in other words, if you have a 30% tax rate and the rewards are worth $1,000, you’d pay $300 in taxes on it)
  • A 1099 is an “information return,” which essentially reports to the IRS “income” you have received, including from employers and other means

Chase is valuing points at one cent each

Chase seems to be valuing all points at a penny each for these purposes, which seems more than fair. Ultimate Rewards points have a “cash out” value of around one cent per point, so just about everyone should value Ultimate Rewards points at least that much (and actually significantly more, in my opinion).

While I don’t think it’s worth doing so here, note that generally speaking you can dispute the values for these kinds of things on 1099s. Several years back View from the Wing wrote a useful post about how to do this (it basically requires calling the IRS), and I imagine similar advice still applies.

Bottom line

Given that both Amex and Chase are now sending out 1099s for referral bonuses, it sure seems to me like something may have changed that’s causing this, or else we wouldn’t be seeing this from both issuers back-to-back.

On the plus side, at least the valuation of points is reasonable, and regardless of what tax bracket you’re in, this should still be worthwhile.

If you receive a 1099 from Chase regarding referring people to cards, please report back!

(Tip of the hat to Doctor Of Credit)

Comments

  1. What if someone from another country just got married in the United States and is waiting for their work permission. How does this work out where they have a 1099 but are not legally allowed to work yet?

  2. A direct result of the money grab by the white Republican male [email protected] wherein there were targeted tax cuts for those few white Republican male assholes while the rest of us pay more.

    White Republican male POS are anti tax only when it comes to their own taxes. In other words they are just common criminal rats.

  3. Chase also has a wonderful affiliate program that allows people to earn online commissions based on successful approvals-signups. Chase Bank is good money.

  4. This is a pleasant step forward. As I pointed out earlier this will help (though a little) to level the redemption playing field. Americans are over-proportionally consuming award space as the points are coming their way much easier than anywhere else. While I don’t mind you guys getting your bonuses, the consequence is that redemption space is more difficult to get by for people who have to earn their miles and points the hard way.
    This is not an issue for your local redemptions as they are hardly aspirational anyway and I can’t think of non-americans trying to redeem on any US airline, but it plays quite a role in the international redemption space.
    So forgive me for being quite pleased about this.

  5. @ Debit

    Yes I got that, thanks. But it works out the same as I am not aware of many banks that offer referral bonuses outside the US. I hold CC’s from 5 countries but they are totally bonus free.

  6. How does this affect non-Ultimate Reward Chase cards. Let’s say I earned 10,000 WOH points with the refer-a-friend Hyatt referral bonus. Is that taxed at one cent a point each too?

  7. Bob,

    Why? The vast majority of travel is business travel, and hotels/airlines are happy to provide miles to business travelers to build loyalty. It’s marketing and advertising. Taxing this would benefit no one.

  8. @Anthony: I read somewhere that hotel and airline points/miles earned from loyalty programs are not taxed because it is difficult to set a fixed value and most points/miles do expire in just 1-2 years. (would have 0 value and I know personally someone who lost 200k+ MR points….) My thinking is for banking and referral they are taxing the “cash amount” paid by the banks to buy the points…instead of the points themselves. It may seem weird but it appears to be the case to me. For Chase UR points the liability to Chase is indeed 0.01 per point if redeemed for statement credit.

  9. Let’s not continue to act as if what’s now happening isn’t already clear because I posted the following yesterday, which made it clear that ‘there is no such thing as a free lunch’ (TINSTAAFL).

    Points earned through general, hotel, airline CC spend are considered a REBATE and will never be taxable, unless the law changes and savings from using discount coupons in your Sunday newspaper become taxable. Points from referrals, on the other hand, are taxable because they are considered INCOME: you spend nothing to earn them.

    Well, here’s the more authoritative explanation I posted yesterday. Let’s stop acting as if this were a fluke or a bank error. It’s a new law that is being now enforced.

    From INVESTOPEDIA:
    “Types of common credit card rewards that are not counted as income include cash-back programs, travel miles bonuses, accumulated points towards future purchases and credit card sign-up bonuses that require a financial transaction to be realized.

    If, however, the sign-up bonus for your credit card does not require that you make any purchases or charge any amount to your card, then you are likely to receive a 1099-MISC tax form in the mail in conjunction with the bonus. Since the IRS requires that these benefits be treated as income, you must document your rewards on the 1099 form. In some circumstances, the issuing credit card company reports the rewards as income to the IRS and state authorities, but this is usually only the case when state law requires such reports.

    You do not necessarily have to receive money in order for the sign-up bonus to be considered taxable. Anything that is provided without being attached to the use of your card – such as airline miles, gifts that are tangible goods or other valuable rewards – are normally taxable income. If you have questions about your credit card reward programs and their tax implications, it is best to consult an actual tax expert and not the issuing credit card company.

    If you receive a 1099-MISC form in the mail as part of a rewards program, do not ignore it. Even if you believe that your gift should not qualify as taxable income (or if you plan on donating your gift to charity, creating a possible tax deduction), you are better off talking to an expert. The IRS has become increasingly competent at tracking income from these sources, and you do not want to subject yourself to a tax penalty because you failed to report your credit card rewards appropriately.”

  10. As for how the banks derive the monetary value of their points to use in preparing your 1099-misc, I did also indicate that it is a complex problem that they handle by hiring professional actuarial services like PricewaterhouseCoopers (PwC).

    Because a portion of the cash from a sale in which loyalty points are awarded cannot be claimed as revenue until the points are redeemed, forfeited or simply lost, that cash “liability” is potential future income for companies that run loyalty programs. Such companies can thus use that potential future income as a HEDGE, by increasing or decreasing the value of the associated points. Therefore, one should fight the temptation to use the simplistic points valuations peddle in travel blogosphere as basis for challenging the income from points associated with CC referrals that banks put on 1099-misc forms that they send out because the value of those points might have been LEGALLY increased or decreased to serve a hedge.

    If you are interested, below is a more formal (wonkish) description of what I just tried to explain above. It includes concrete example that might make it all quite clear:
    _________________________
    “….it can be seen how changes in points’ value impact profitability due to the deferral process: increasing (decreasing) the value of a point translates into more (less) deferred revenue, which directly hurts (improves) profits/earnings. For firms with billions of outstanding points, even small changes pertaining to loyalty points can thus have a first-order impact. For instance, according to Delta Airline’s 10-K statement for 2015, “A hypothetical 10% increase in [mile value] would decrease [revenue] by approximately $48 million, as a result of an increase in the amount of revenue deferred”. Such changes are not only hypothetical, but do in fact arise. In 2008, Alaska Airlines decided to shorten its points’ expiration date from three years to two. This change reduced the total value of its points and the associated deferred revenue, enabling the airline to claim an additional $42.3M in revenue, and reduce its consolidated net losses for the year by a staggering 24% (Alaska Airlines 2008).

    The Alaska Airlines example also highlights how reducing point values (and thus their liabilities) can improve the firm’s operating performance in otherwise poor quarters. This suggests that earnings smoothing incentives can become particularly pertinent when considering point valuation decisions. ***Similarly, since the deferral process influences the revenue taxable year of inclusion, taxation can also become another important managerial consideration influencing loyalty point valuations.***”
    _______________________________________

    statement in [***] indicates Q.E.D and is worth repeating:

    ***Similarly, since the deferral process influences the revenue taxable year of inclusion, taxation can also become another important managerial consideration influencing loyalty point valuations.***

    The value of points can be adjusted up or down LEGALLY to serve as a hedge.

    G’day.

  11. eeeeks, going forward no more referring from me…. not that I refer much. Once or twice a year. More work than it’s worth.

  12. Hat Tip to DoC? Hat tip to me, it was my DP- these are my 5 mins!

    Seriously though- the whole thing blows, but it is what it is. Can people like yourself and TPG, who have in-roads and relationships with the banks, reach out and get more to the bottom of it?

    These stories are just regurgitating the subreddit information. You guys have what we don’t- the mutually beneficial bank relationship. Getting that scoop would be very valuable to us, the reader.

  13. I just got a referral promotion from Citi that includes the curious requirement for charging at least $600 over the course of the year. Sounds like a direct response to the 1099 issue.

  14. @Andysol2983 asks: “Can people like yourself and TPG, who have in-roads and relationships with the banks, reach out and get more to the bottom of it?”

    Here is what seems to me like sound advice from Investopedia: “If you have questions about your credit card reward programs and their tax implications, it is best to consult an actual tax expert and not the issuing credit card company.”

    Bank tellers or portfolio managers are no tax experts!

    As a tax law, the matter seems pretty clear to me, so I am not sure what else can be learned in general. Individually, consulting a tax expert seems like the thing to do. Anyway, I have my quarterly meeting with my Chase Private Client account manager. I will be sure to ask him his take on it (he himself plays the mile/point game).

  15. @DCS – I mean what their PR department says as to why they are doing it *this* year and not in year’s past.

    Your relationship with your CPC manager dwarfs in comparison to the millions and millions of dollars companies like OMaaT and TPG bring to the banks. Your guy/gals information won’t let us know anything. Chase and AMEX’s primary PR or an executive will give a better answer.

    I’m not expecting anything to change tax wise, it is what it is. But I would like to hear what they say, even if it is a bunch of PR spin.

  16. I thought the rule was that cash for opening or referring a new account is taxable, but points, miles or gift cards were not taxable

  17. @Andysol1983 – I have no idea what you are getting at. The bank is just another taxpayer. The PR department does not know anything about tax law and won’t be able to tell you why referrals are being taxed now and not before — something that does not require a genius to figure out: The IRS decided to enforce the law. How much money OMAAT or TPG may bring to the banks is completely irrelevant to my relationship with the bank nor my ability to get the correct information. You simply need to know where to get it. Going to the banks’ PR departments for tax-related info is the wrong thing to do.

    G’day.

  18. DCS’ response makes the most sense, and is likely correct

    Obviously the IRS is focusing on this area, hence Amex and Chase both dropping this bomb in 2019

    I wonder if there is a loophole though. Such as
    “Refer a friend, and get 20k points after $2k spend”

    This might transform it back to a rebate, from income.

    Random thoughts

    It is intriguing that Trump’s IRS is focusing on this. Perhaps payback for Big Finance’s Obama and Clinton donations?

    Also, it shows that if you give an inch, people will take a mile… if you restrict them to a kilometer they’ll gnash their teeth and caterwaul something fierce

    You’d think a 1099 is worse than water boarding

    As long as the points are fairly valued (and at 1 penny, they are) there’s little to whine about. The deal is just a little bit less lucrative than it was in 2018. (20-35% for most of us, and that’s if you redeem for a penny which is unlikely )

  19. @JRMW: “I wonder if there is a loophole though. Such as“Refer a friend, and get 20k points after $2k spend””

    There is no loophole or the possibility of one in there because the person spending the $2K and the one earning the 20K referral bonus are not the same. It cannot be a rebate because the person receiving the 20K bonus spends no money.

  20. Is this the first step in the end of the points hobby? As most points are earned with other people’s money then will you collect points if they are income to you?

  21. The sky is not falling. You can begin to worry when savings you realize from using discount coupons in your Sunday newspaper become taxable as income…

  22. I actually agree with DCS. Much rather pay ~$100 in taxes for 100K Ultimate rewards than having no points. Taxes from referral fee still much less than buying points outright.

  23. Plan a strategy early in the year for write-offs (investment & business losses are a couple) you can take later in the year to offset, or minimize, the cumulative years’ income effects.

  24. Looking in my crystal ball now and it shows the Democrats taxing ALL point values in ALL accounts. They want 70% of my retirement and 40% of anything left going to the kids. Yep, they will be taxing all those points we all have. Afterall, they do write the tax laws.

  25. I’m just going to reiterate the comment I’ve made on other posts when folks starting getting the Amex 1099s… This is all thanks to the Republican/Trump tax code rewrite. Most little guys are finding they got screwed in the deal, and these 1099s are another example. But hey, the rich took home boatloads more cash.

  26. They should just restructure these bonuses so in addition to the referral, you have to spend some money to get the rebate.

  27. I read this article yesterday and today I’m disappointed to report that I received not one, but two 1099’s from Chase!!

    I guess they decided to separate the business cards from the personal ones as I received one for $500 and another for $400…

    As much as I love collecting points, I’m not thrilled with them being taxed at 40+ percent… Sure, I could redeem some of my 3+ million (Chase) points to pay the taxes, but I just can’t bring myself to do it as I consider that a waste of value.

  28. Chase also reports RETENTION Offers, Incentive to sign up for Paperless Statement, and Quick Pay as Income on the 1099 MISC!

    This Reddit thread has many DPs in the comments about the items on the 1099s – they are not limited to referral bonus!

    https://www.reddit.com/r/churning/comments/amh48i/chase_1099_reporting_thread/?sort=new

    The worst part is, when people call the telephone number on the 1099 they are getting India call center… I seriously doubt the India call center phone reps have any idea of what the 1099 is.

  29. I received a 1099-MISC from chase for $1000 (I have 2 cards, $500 each) though I have NEVER referred anyone. The only rewards I have received were points for purchases ($667 on one card, $63 on the other, so well short of the $1000 they are claiming I got). I can’t get anyone at Chase who understands these forms or who can help me fix this issue. Thinking about cancelling my cards right about now.

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