Court Rules in Favor of Citibank and Against Customers Who Use Credit Cards That Amass Rewards Points

Many people sign up for credit cards so they can take advantage of low introductory rates or the rewards program that the company offers. These reward programs often give you bonus points that you can cash in for airline tickets and other desirable items.

And in a few cases, the credit card company may send you a check at year’s end if you have consistently paid your balance in full every month.

Not surprisingly, these inducements make carrying this company’s credit card a pleasure.

But there’s a catch.

In a case where Citibank awarded its new cardholders points they could use to purchase airline tickets, the Court ruled that the tickets’ value is taxable.

Here’s what happened that led to the lawsuit.

Citibank announced to cardholders who opened an account to accumulate points that they would receive a 1099 representing the miscellaneous income. This came as a surprise since the cardholders did not know this at the time they applied for the credit card.

As cardholders started receiving these forms, which were also sent to IRS, they were so outraged that they filed a class action lawsuit. Despite good representation by a qualified tax lawyer, the Court found in favor of Citibank and held that the value of items purchased with these reward points is taxable.

Without question, this had a chilling effect on taxpayers.

The Court said that under U.S. tax law, “all income derived from whatever source” is taxable. Fortunately for cardholders, the IRS agreed not to tax airline fares that were purchased with points when the travel was for business.

This, however, does not lead to a good outcome because, when filing their income tax returns, many people cannot itemize deductions or take certain tax credits.

Now, with the added confusion about how to prepare and file taxes, the IRS will likely start questioning the content in your income tax return. This may result in an audit or some other type of investigation. If you must respond to IRS for these or other tax-related issues, make sure you contact a qualified attorney who knows tax law or a CPA.