That blender you received from your bank? The tax man loves smoothies too

September, 30 2014 by Eric Linden

Banks love to give out “freebies” to new customers for opening checking accounts and the like. Be it an apple corer or a Vitamix (OK, maybe not a Vitamix… how about an Osterizer?), who does not feel a pulsating warmth inside when they see that beautiful blending apparatus presented to them by Mr. Banker. Well, here is something to quench your warm and fuzzies. A recent court case, Shankar v. Commissioner, states that these types of “thank you gifts” from banks are taxable.

My bank’s rewards program offers “a wide and flexible range of redemption choices, including cash redemption options, gift cards, travel, brand-name merchandise and digital rewards (MP3 music tracks, games, software, eBooks and audiobooks).” You can also “redeem your earnings for airline tickets, hotels, car rentals and cruises, and enjoy the perks of travel without the hassle of blackout dates or air restrictions.” The value of the items you receive by redeeming your points will be subject to taxation.

The IRS has always taxed the “bonus” gifts from a bank when they treated it as interest, but it was always included in your Form 1099-INT for that additional interest, and most people did not even notice. The big difference now is that it can be reported on a slightly different form, Form 1099-MISC. Most taxpayers, and last I heard that includes just about EVERYONE, do not understand that the “value” of what they won is considered “accession to wealth,” which the tax courts say is taxable in that tax year and not when you dispose of the asset.

This is similar to catching a major league baseball that sets some type of sports record, and therefore has immediate value. Uncle Sam reads the paper and keeps track of this type of event, among many, many others. And Uncle Sam expects to see that Fair Market Value (FMV) listed on your tax return for that tax year as income.

What about those great frequent flier miles? Reduced air fares are a common and much beloved bank gift. And while the value of the miles redeemed with bank reward points is taxable, frequent flier miles issued by airlines are still not taxable. The reason is that rewards and discounts issued by credit card companies as well as frequent flyer miles by airlines are not considered taxable income. These rewards are considered a reduction of the cost of your purchase, and this cost may be a tax deductible expense.

For instance, you are going to take a business flight on Southwest Airlines and the normal cost is $100, but you use some of your frequent flyer miles to purchase the ticket. You did not have to pay any real cash for the ticket, so your cost is $0. Therefore, your business deduction is $0. Now let’s look at the bank gift from the IRS’s point of view, a scary proposition, I know: If Bank A gives me $50 for opening an account, I now have $50 I did not have before and my personal wealth just increased to the tune of $50! This is what is known in tax court parlance as my “accession to wealth.”