There are two easy ways to make money in the financial world. And no, I’m not talking about stocks and bonds. I’m referring to credit card rewards and bank bonuses.
And while both can be quite lucrative, all for doing very little work, there is an important distinction you should be aware of before going after this “free money.”
Many credit cards offer sign-up bonuses these days, which require you to spend a certain amount of money in a specified time period to get extra points or miles.
For example, the Chase Ink cards offer up to 70,000 bonus points just for spending $5,000 during the first three months of membership. That equates to more than $700 in value, assuming you don’t just cash it out and use it for more valuable rewards instead.
At the same time, banks like Chase also offer big bonuses when you open checking and/or savings accounts. One example is the $300 for checking, $200 for savings combo I recently took advantage of.
But these offers aren’t necessarily created equal. And I’ll tell you why.
Beware the Tax Man
At the moment, credit card sign-up bonuses aren’t considered taxable income because credit card issuers require you to spend money to get them. Often times a lot of money.
In other words, they’re treated more like rebates or discounts in exchange for choosing to spend with plastic instead of cash, just like a coupon or a percentage discount you would receive in a store.
Simply put, you have to spend money to get some portion of it back. You don’t just get money for opening an account and funding it with cash.
That being said, checking and savings account bonuses are subject to taxes, and if you look at the fine print on those bonus mailers from Chase and other banks, you should see something about an IRS form 1099-INT.
Because these account bonuses typically only require you to open an account and put some money in it (or set up direct deposit), the bonus money is considered interest.
And as we all know (or should know), interest is taxed as ordinary income. So the bonus money and the interest accrued in said accounts is all taxed. That makes the bonuses slightly less lucrative, depending on your tax bracket.
It’s not the end of the world, nor reason to completely write off such bonuses, but it does give credit card offers an advantage if you were to choose between the two.
I’m happy to go after both types of bonuses, but it is nice to get the credit card ones tax-free.
The caveat is that the credit card bonuses do require a lot of spending, so there’s a decent possibility you’ll actually spend more than you should. So in that sense, it could actually come back to bite you.
The bank bonuses, on the other hand, reward you for saving and putting money in bank accounts, which should do nothing more than boost your nest egg. Just watch out for monthly fees for not meeting bank requirements and be on the lookout for those pesky tax forms…