Posted by William Charles on February 6, 2019
Credit Cards

Published on February 6th, 2019 | by William Charles

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Did Citi Add Spending Requirements On Referrals To Avoid Them Being Taxable?

Citi has recently started offering referral bonuses on credit cards, one weird requirement is that the primary cardholder doing the referring needs to spend $500 before they are eligible to earn any referral bonuses. We’ve recently seen Chase, American Express & Discover issue 1099 forms for referrals. I don’t know for certain, but my gut feeling is that Citi added a spending requirement so that these referrals are being treated as a rebate (as normal credit card bonuses are) and aren’t taxable. Citi also limits you to $500/50,000 points per card, which is below the $600 threshold as well.

If that is indeed the case then I wonder if we will see spend requirements added for the existing cardholders for Chase, American Express & Discover referral bonuses to help avoid taxes.



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msb1xr
msb1xr

Citi being smart? What is this?!

gary
gary

i dont think citi is that smart

tro
tro

I do. Of course the banks don’t want to have to do this if they can avoid it, sending these out is all downside for them too:

1) The bonus you are paying for is now about 25% less valuable (or whatever the customer’s marginal tax rate is)

2) You need the IT (& personnel) to keep track of accounting.

3) You need customer service to respond to customers, including confused ones who don’t even know what a 1099 is, ppl who want to argue about point value, ppl who are mad this wasn’t made clearer ahead of time, etc.

4) Maybe: Could be other ramifications of assigning a $$ value to their award currency (not sure if this one really matters).

To me the question is, if it’s that easy to avoid sending these out, why are the other banks so dumb?

Ann
Ann

“4) Maybe: Could be other ramifications of assigning a $$ value to their award currency (not sure if this one really matters).”

The other banks’ posts have seen people pointing out that having been taxed on the rewards points before redeeming them means the bank should no longer be able to yank them away from recipients for any reason, as the taxation makes it your property.

Closertothesun
Closertothesun

Ann – all well and good for Amex, but Chase doesn’t really yank points anyway.

Shawn
Shawn

Unfortunately, the CFPB has been completely gutted and rendered rather teethless. If the banks take it, there’s really not much to readdress the situation.

Security
Security

Huh. Interesting point.

Would the others really follow suit though? Do they have an incentive to avoid/not send 1099s?

Frank Rizzo
Frank Rizzo

Yeah, people are more likely to put in the effort to refer others if the offer is more appealing. And if this means you don’t have to pay taxes, then it is a much better offer.

Dylan
Dylan

Yep, I know I would.

If they want to add a spend requirement to referral bonuses, I say go ahead. I’ll just buy a VGC anyway for the purchase.

Bill
Bill

It costs them money sending all those 1099s and tracking them.

Security
Security

They have to track that info anyways imo. And the layman isn’t going to check if Citi sends out 1099s, only churners do that

vipul
vipul

Everybody who files taxes carefully tracks 1099s. It has nothing to do with churning.

Security
Security

You missed the point.

Burton
Burton

It may not impact people’s decision to refer initially but will in subsequent years. Few people appreciate surprise taxable income and receiving it will make them less likely to refer in the future.

Also, the cost to mail/post 1099s is significant even if they already have the information in their database. There are marginal costs associated with printing (to paper or pdf), distribution, and dealing with questions/complaints.

Security
Security

Yeah I can definitely see that. Just thinking of relatives and other non-churners they would not give a second thought. The moment they see the word “tax” — eyes glaze over and the conversation is ignored.

Sarah D
Sarah D

Why do companies pay for benefits instead of just giving you the cash value? Obviously to avoid taxation.

Sevillada
Sevillada

They could make it spend $50 or make one purchase if they are trying to be nice (and simpler)

Mark
Mark

I agree. Their intention was not to make your life easier. It was meant to make it harder to get the referral bonus.

Dave P
Dave P

Mark, I mostly agree, but I think it may also have been to make THEIR life easier. It’s more work for the company to have to send out more 1099s, too. And making it harder for people to earn their bonus is probably a nice side effect for them.

Dylan
Dylan

In a way this could also make YOUR life easier because you no longer need to pay taxes on a 1099 and file said paperwork for your return.

I 100% agree with citi’s approach here. Add a spend requirement and the referral becomes a “rebate” on purchases.

All it means for me is I have to go to giftcards.com and liquidate a VGC. Whatever, I’ve done it a billion times.

Frank

I can’t give you a $500 rebate on a $50 purchase. $500 means Citi can justify it as a rebate

sam
sam

But by that logic we are screwed for signup bonuses if something changes tax-wise….

tro
tro

I don’t follow? Any tax law can change, not just laws based on rebates.

sam
sam

I mean if you’re saying the rebate can’t be larger, and you couple that with miles/points that have “various” values as loosely defined by each bank, it can easily mean sign up bonuses aren’t really rebates either if the amount “spent’ is less than the miles/points value. There are still sign up bonuses for “first purchase” (any amount) also. This also make me concerned about other things that are really not “spending” in any sense of the word to earn sign up bonuses. I don’t know any better than the next person, I just see this taxing of referral bonuses as a possible “warning” for things to come. It seems the pattern is retract, and reissue in following years, but without warning beyond that. It is one thing to do the bonuses knowing full well they are taxable and how, but these 1099’s are a surprise, regardless of what the terms say because of the past practices…

Darv
Darv

The worst case scenario if you leave something off your return is that you’ll get a letter from the IRS saying you made the mistake, fix it. They’re not going to audit people with incomes on here. I mean maybe, but the chances are close to zero–seriously. And even if they do, it likely won’t be a full audit. The IRS isn’t out to get people, and if you make a mistake they’ll send you a letter, for situations like this. It’s not the end of the world if you file a return and honestly miss a 1099.
Source: I was worried so I googled this stuff. I once received a letter in Informed Delivery from the IRS and panicked. Turned out it was a FAFSA notice my wife didn’t tell me about.

Burton
Burton

Fully Agree. The IRS and most states would much prefer to send a letter to you with a simple correction than dedicate their scarce resources to chasing down a few dollars from you. I’ve received (or helped family) with a handful of letters over the years. Sometimes they are right and no action was required, just a minor increase/decrease to my refund. Other times we were right and I was able to resolve in a 5 minute phone call (plus hold time).

Darv
Darv

It depends on how you look at it. Perhaps the logic is that they’re acquiring you as a long-term customer and while the initial spend requirement is $50, they expect you to spend more than that. Barclays has promotions where they require you to make one purchase, of any amount, and they will give you 60,000 American Airlines miles. Those miles aren’t cash but the IRS probably will argue they are worth something, and almost certainly more than $1, if that’s all you spend in your one purchase. My tax accountant says that basis does not matter when determining if a situation is a rebate. In other words, the difference between the $1 I spend for a Barclays promotion and the value of the 60,000 miles is not income, it’s still a rebate. In the referral situation, it might be different, I don’t know all the circumstances, but I suspect that if you’re required to spend money to get a bonus, a bonus of any amount, the entire bonus is considered a rebate. The IRS would need to issue guidance for confirmation if these are uncharted waters.

M
M

But a $500 rebate on $500 in purchases would actually be the maximum viable “rebate”, right? Isn’t that what we’re talking about here?

Closertothesun
Closertothesun

Tell that to Barclay’s about their Aviator bonus with one purchase.

VL
VL

Nope they could not. After spending $500 on a given card you are eligible to refer and get up to 50K points in referral bonuses, which in their books equal $500… what you have spent. Basically $500 is a min they could do to make your full referral allowance non taxable. Big thumbs up to Citi (never thought I would say that :))

They are just playing safe… so there is no question about the rebate being higher than spend. Plus they will enjoy higher spend. Seems like a win win situation for me.

Brian
Brian

Has anyone actually received a Citi referral?

MW
MW

I did

RMSMKE
RMSMKE

I think Citi should make it one purchase
that is betweenn $500 and $507.

Dylan
Dylan

GOOD.

This is the approach EVERY SINGLE card issuer should be taking.

Issuing customers 1099’s will make them sour, and adding a spend requirement is an easy way to save this and turn the bonus into a “rebate” to avoid 1099 reporting.

Kevin
Kevin

But why does it make people sour? It’s no different than paying taxes on anything else. I just don’t get it. Yes it is annoying but there’s no free lunch

chop
chop

Seriously?

Dylan
Dylan

People dp not expect yo be 1099ed for refereal bonuses. These spend requirements mitigate the need to send one.

Snorlax
Snorlax

Because people don’t like paying taxes. 🙂

Sarah D
Sarah D

In a multi-agent scenario two can collaborate to benefit over the third. In this case, citi and the consumer can avoid the IRS taking a cut by changing the specifics, but not the ultimate substance of the transaction. We get more lunch, America in general gets less.

Alex
Alex

So you’re saying there is one smart person working at Citi, and the bank finally listened to their suggestion?

Mjs
Mjs

Disagree.

Using Occam’s Citibank Razor, Citi decided unanimously to send out 1099s, but when they gave the instructions to the programmers, they screwed up and wrote the wrong code 🙂

Paris
Paris

haha

Jo
Jo

For normal people who don’t know what manufactured spending is, this is a significant deterrent to referring friends.

In my opinion, Citi could have done this for multiple reasons
1. They don’t want to send out 1099s because it’s more work for them. (As earlier stated, they’re probably not that smart).
2. They get their customers to spend $500 more on the card.

If they did want to just help their customers they would make the spend requirement $.01.

MoreSun
MoreSun

Nah. Im going with dumb luck- they’d rather not payout the bonuses so they tacked this weird requirement on. The way the 1099s were pushed out makes me think the banks panic pushed them out & found out very last second: all 3 just a day or two apart, nothing available online. Citi was the blind squirrel who found an acorn.

Scott
Scott

This policy makes referral bonuses much easier to justify to management: it adds an additional element of customer retention, and it is now cheaper from them to do referrals than the competition. So as a result there ought to be more and better referral offers going forward.

Mike
Mike

Is the $500 spending required every year? Otherwise it would only avoid the issue this year.

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