The hidden costs of helping friends get more credit card rewards – San Bernardino Sun

A credit card is inserted into a credit card reader for payment processing in La Puente, California, on September 11, 2023. (Photo by FREDERIC J. BROWN/AFP via Getty Images)

By Sara Rathner | NerdWallet

Thanks to travel rewards credit cards, you can spend the summer like a star for the price of a vacation at home, and your friends will start to notice. There’s no reason to keep your travel secrets to yourself – the more friends who know how to earn valuable rewards, the more people will join you on epic adventures at deeply discounted prices.

Not only do you take the time to answer their credit card questions, but you also send them referral links if you have a card they’d like to apply for. If they get a card with your referral, they can earn a generous sign-up bonus by meeting the card’s spending requirements, and you get “paid” for your time and expertise by earning a referral bonus.

However, there could be a catch: the referral bonus may be linked to a tax payment.

How the IRS assesses credit card rewards

You may have to pay taxes on some credit card rewards, depending on how you earn them and the dollar value you redeem.

“If you have to spend money to get it — for example, you get a bonus after spending $3,000 within a certain period of time — then it’s not taxable,” Luis F. Rosa, a certified financial planner and licensed agent in Las Vegas, said in an email. “However, if no money was spent and it was just an incentive, then the income is taxable.”

According to the IRS, rewards earned through spending are considered rebates that are not taxable. However, you don’t have to spend anything to get a referral bonus, so it may be taxable, especially if you earned at least $600 in value.

This is clearly spelled out in the fine print of credit card providers, with some providers providing more information than others. Citibank’s terms and conditions are quite specific, stating that you may have to pay taxes on rewards in the year of redemption and that Citibank determines the value of those rewards. Chase and American Express also have tax disclosures in their terms and conditions, but these are more vague, essentially stating that you may be earning taxable income and, in that case, you will be responsible for the tax liability.

If your credit card rewards earnings meet the requirements to be taxable, your card issuer will give you a 1099-MISC form that contains information you must include on your tax return. Rosa says that even if your referral rewards earnings are less than $600 and you don’t receive a 1099-MISC, you should still report that earnings to the IRS.

If in doubt, you should consult a tax advisor about your individual situation.

Should you tell friends about credit card offers?

Any taxes you may have to pay will of course be a percentage of the bonus value, so it may still be worth it for you to refer friends and deal with a slight increase in your taxable income later.

However, there is another case where you might want to wait a little longer for the sake of your friendship. Sometimes a card’s welcome offer is larger if you apply through the card’s website or at a bank branch. In cases where your referral will earn your friend a smaller bonus, the decent thing to do would be to make them aware of the larger bonus.

Sure, you won’t get a financial incentive, but you’ll gain your friend’s respect and avoid potential taxes.

Sara Rathner writes for NerdWallet. Email: [email protected]. Twitter: @sarakrathner.

The article The Hidden Costs of Helping Friends Get More Credit Card Rewards originally appeared on NerdWallet.