If you have a bank account that earns miles or points as a reward for opening or maintaining the account, you may wonder if you need to report those rewards as interest income on your tax return. The answer depends on how the bank treats those rewards and whether they send you a Form 1099-INT, Interest Income, or not.
How Banks Report Rewards Programs
According to the IRS, rewards programs that provide incentives to open or maintain an account are generally taxable as interest if the rewards are paid in cash, property, or services. However, the IRS has not issued any definitive guidance on how to treat rewards that are paid in the form of miles or points that can be redeemed for travel or other benefits.
Some banks may treat miles or points as interest and report them on Form 1099-INT, while others may not. For example, in Shankar v. Commissioner, the Tax Court held that a taxpayer had to include in income the value of an airline ticket he received by redeeming points that he had earned from a bank’s rewards program for opening an account. The bank had reported the value of the points as interest on Form 1099-INT, and the court agreed that the points were a substitute for interest.
On the other hand, some banks may not report miles or points as interest, either because they consider them as rebates or discounts, or because they do not have a reliable method to determine their fair market value. For instance, Citibank states on its website that it does not report ThankYou Points earned from its checking accounts as interest, unless required by law. Similarly, Chase does not report Ultimate Rewards points earned from its checking or savings accounts as interest, unless the value of the points exceeds $600 in a calendar year.
How to Report Rewards Programs on Your Tax Return
If your bank sends you a Form 1099-INT for your account accruing miles or points, you should report the amount shown on the form as interest income on your tax return, unless you have a valid reason to dispute it. You should also keep records of how you calculated the value of the miles or points, in case the IRS questions it.
If your bank does not send you a Form 1099-INT for your account accruing miles or points, you may still have to report the value of the rewards as interest income, depending on the facts and circumstances of your situation. The IRS may consider the rewards as interest if they are paid as an inducement to open or maintain the account, and if they have a readily ascertainable value. You should use a reasonable method to estimate the fair market value of the miles or points, such as the retail price of the goods or services you can redeem them for, or the amount you would have to pay to buy them from the bank or a third party.
However, you may not have to report the rewards as interest if they are paid as a rebate or discount on the fees or charges of the account, or if they have a nominal or uncertain value. For example, you may not have to report the rewards if they are based on the amount or frequency of your transactions, or if they can only be redeemed for a limited selection of items or under restrictive conditions.
The following table summarizes some of the factors that may affect the taxability of rewards programs:
| Factor | Taxable as Interest | Not Taxable as Interest |
|---|---|---|
| Form of Reward | Cash, property, or services | Miles or points |
| Reporting by Bank | Form 1099-INT issued | No Form 1099-INT issued |
| Purpose of Reward | Incentive to open or maintain account | Rebate or discount on fees or charges |
| Value of Reward | Readily ascertainable | Nominal or uncertain |
Conclusion
Rewards programs that offer miles or points for opening or maintaining a bank account may or may not be taxable as interest, depending on how the bank reports them and how the IRS views them. If you receive a Form 1099-INT for your account accruing miles or points, you should generally report it as interest income on your tax return. If you do not receive a Form 1099-INT, you should use your best judgment to determine if you need to report the rewards as interest income, based on the factors discussed above. You should also keep records of your rewards and their value, in case the IRS audits you. If you are unsure about how to report your rewards, you should consult a tax professional for advice.
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