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More Bad News on Taxes and Points: Amex 1099′s Gift Chain Prizes

by on February 8, 2012 · 52 comments

in American Express, Taxes

When Citibank sent out 1099’s last month to customers who had received 25,000-point sign-up bonuses for opening checking and savings accounts, the whole points community was up in arms. The tension ahs somewhat subsided a bit thanks to the IRS basically saying it plans to take no major actions on this topic for the time being, but I know many people, myself included, are uneasy with the whole situation. Things are ratcheting up again this week since people have been receiving 1099-MISC forms like the one below from American Express for bonuses and gifts earned through the Amex Gift Chain back in December.

The Gift Chain

As a reminder, the Amex Gift Chain was a special promotion where you registered your Amex card, and then you’d receive a gift for purchases of $25+ between the beginning of December and December 21 (or until supplies lasted). I personally registered my two Amex charge cards and got 10 gifts each for my holiday shopping purchases at participating retailers like J. Crew, Lenovo, Pottery Barn, Toys R Us, Walmart and more.

The assorted prizes I got were Starbucks $5 gift cards, some $20 Amex gift cards, a few statement credits of between $5-20, 500 Amex Membership Rewards points, and a one-year membership to ShopRunner, among other little prizes. Not to jinx myself, but I have not gotten a 1099 from American Express for the Gift Chain so far this year.

The 1099 Tab

The 1099 form a TPG reader received for his Amex Gift Chain points bonus.

This 1099 is from a TPG reader who registered his 7 Amex cards for the promotion and scored gift cards like a $50 Amex one, $10 from Walmart, $2 from Dunkin’ donuts, and a $90 statement credit. For the breakdown of 1099 charges, he noted that these were being taxed at their face value as “Other Income.”

Where things get murky are that the Membership Rewards points he also earned from this promotion are being taxed at a rate of about 1.5 cents each, with no explanation of the math there. Plus, he got 7 ShopRunner memberships (one for each registered card), which are being valued at a whopping $79 each!

For those of you that don’t know, ShopRunner is an online shopping portal that partners with big retailers like PetSmart, Calvin Klein, Timberland, RadioShack and others. When you become a member and purchase items through their portal, you get free two-day shipping on your purchases. The first 30-day trial period is free, and then you are charged either $8.95 a month or $79 for a year. Well, that’s where Amex got their taxation value from. However, ShopRunner has given memberships away for deeply discounted rates and even free (just this past December at the same time as the Gift Chain promotion), making this even more of a punch in the wallet!

Not only that, but in this particular TPG reader’s case, the ShopRunner membership was usually the first prize he earned in the Gift Chain—no surprise since there were far more of these memberships being rewarded than any other type of prize—before any of the other gift cards, statement credits or MR bonus points, and it happened with each of his cards, adding insult to injury.

A Possible Loophole?

We took a look at the official rules of the promotion again, and sure enough, there’s a clause on taxes: “All federal, state, and local taxes, if any, as well as any other costs and expenses associated with Gift acceptance and use not specified herein as being provided are the Recipient’s responsibility.”

For the ShopRunner membership issue specifically, our TPG reader might still have some hope that he might not have to pay taxes on all of them if he has not yet activated them, per Amex’s statement: “1-yr ShopRunner Membership: The Recipient of a 1-yr ShopRunner Membership good for free 2-day shipping on purchases made at select online retailers must click on the link in the confirmation email and create a free one-year account with ShopRunner before February 29, 2012. Limit one (1) 1-yr ShopRunner Membership good for free 2-day shipping on purchases made at select online retailers per Eligible Card. Terms and conditions apply to 1-yr ShopRunner Membership good for free 2-day shipping on purchases made at select online retailers, available at www.shoprunner.com.”

Considering even one ShopRunner membership, let alone seven, doesn’t seem like such a great deal, I’d suggest asking a tax professional whether you indeed have to report unclaimed prizes as income and hope they say no, so at least you can take a few of those $79 values off your final tab.

Why, Amex?

It just sort of surprises me that Amex is willing to squander the goodwill it engenders with promotions like this by slamming their valued customers with 1099’s.

Disclaimer: As always, be sure to consult an accredited tax professional advice before taking any action since I am in no way providing professional guidance on tax issues here.

Disclaimer: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author.s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.

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  • Danny

    I am in a similar situation and have gone a few rounds with AmEx and IRS phone support. Basically AmEx isn’t budging on their assessment of Shoprunner value (or, for that matter, full face value of GCs). There used to be a form you’d get the IRS to send them to dispute the value of your prize but that is no longer true. These days if you’d like to dispute the value of a 1099-MISC you report what you believe to be the correct value and you append your explanation to your taxes. Let me tell you how much I love AmEx right now for possibly increasing the chances I get flagged for an audit. I am greatly looking forward to calling up next week to cancel my Platinum before renewal and explaining to them exactly where they lost my business. I have no problem paying taxes on prize winnings, but my Shoprunner membership has cost me something like $88 in taxes (for winning four of them) for a membership that only costs $79 retail.

  • Ricohitman

    Oh god….this doesn’t look good for all the nice offers out there…

  • User

    Seeing how this is trending among credit cards, does this mean I could potentially have to claim $25,000 in income when I cash out my 150k BA miles with companion pass for two first class tickets overseas?

  • Anonymous

    Yikes. I’ve already filed my taxes, one of these better not show up in my mailbox.

  • http://www.rewardingenuity.com/ Fewtreezy

    I have not yet gotten a 1099 but I used my 4 amex cards in the promotion. Do we know how they are treating the sharable gifts? That’s where all of my value came – claiming gifts from my buddy who posted them on my wall and vice versa. I would say 60% of what I valued my gift chain promotion at was claims from sharable gc’s. If the TPG reader got the share 3 times gift, was he taxed for all 4 gifts or just his?

  • http://twitter.com/BrianKlick Brian Klick

    Listen, I think it is absolutely wrong to blame American Express in this instance. Do you think they just voluntarily like sending out these forms to folks and spending time, and money, on it? I’m sure that their lawyers/accountants advised them on this, and they are sending these out to protect themselves.

    As far as the Shoprunner $79 value, that IS the retail price of a year’s membership. Just like if you win a diamond ring appraised at $20,000 (but street/real value is only $5000), guess what, you get a 1099 for the $20,000 and have to deal with it.

    This is the tax law of the United States, and a corporation should not be blamed for following it, which is what American Express did. Everyone knows that an individual is responsible for paying taxes on all winnings in any contest they participate it – being that 99.999% of folks don’t do this – still does not make it right or legal.

    Instead of blaming American Express, blame the government or IRS. They are truly the ones responsible, not a company trying to abide by the law.

  • sb

    is it possible that this gets triggered above a certain $ value?

  • http://twitter.com/BrianKlick Brian Klick

    Suppose to be $600.

  • http://twitter.com/BrianKlick Brian Klick

    Companies are required to mail them by 1/31, so I’d say at this point it looks like you are safe.

  • Miami_studd

    We know that AMEX didnt pay 79 for shoprunner….
    Why do we pay Shoprunner retail and not AMEX wholesale?
    If this is the case then perhaps AMEX should be offering things with real value and not this crap they have been offering lately. This plus the loss of so many airlines starts to make AMEX look like a budget outfit or HSN

  • HikerT

    lol, registered 7 Amex cards? Karma’s a bitch ain’t it?

  • HikerT

    We took a look at the official rules of the promotion again, and sure enough, there’s a clause:

    “Limit of one (1) registration per person/Eligible Card; if it is discovered that you have registered or attempted to register more than once or have attempted to register/participate multiple times using multiple identities or email addresses, all of your entries will be declared null and void, and any Gift you might have been entitled to receive will not be distributed. Registration will be closed after 250,000 registrations have been received.”

  • http://twitter.com/BrianKlick Brian Klick

    That’s the tax rules – you don’t get charged “wholesale” or “purchase price” for any winnings in any contest. You always get charged “retail price”. If a company buys a diamond ring for $1,000, and it appraises at $10,000 – you’ll get a 1099 for $10,000. If you win the lottery at $1 million, you don’t get a 1099 for the cost of the printing the lottery ticket.

  • http://www.rewardingenuity.com/ Fewtreezy

    I spoke with American Express at the time of the promotion and they confirmed that the clause referenced above is referring to multiple cards on an account. So, if me and my wife both have cards for one PRG account, then I can’t register both of those cards. HOWEVER, if you have a PRG, Plat & SPG, then you can register all 3 of those cards.

  • http://twitter.com/zekenix Zeke Kersey

    Credit cards are taking the same stance as airlines and banks and passing fees onto the user or coming up with creative new fees.

  • Dan

    If you’re worried about a full blown audit, I wouldn’t sweat it. Why? For the sake of argument, assume you incurred $600 in taxable income through these prizes, and you’re in the 25% bracket. Your net tax is $150. I read in the Washington Post that the IRS is lacking enforcement agents, and can’t do the audits that they want. I’d assume it’s not worth their time to do a full blown audit on you over $150.

  • Asdfasdfasasdf

    I think brokerages have until 2/15 but i am not a financial pro

  • Rob S.

    Way off the mark blaming American Express on this one Brian. You think they do this to spite their customers or because they are required to by law? If you want to blame anyone, blame the IRS.

  • Rob S.

    What does this article have to do with passing fees onto the user or a creative new fee?

  • Jo

    I agree with Brian Klick.
    It is NOT Amex’s fault to report your earnings. Amex has to follow IRS guideline and report income.

    So dont blame AMEX.

    The poster Brian Klick is correct.

  • pbimm

    I received several ShopRunner memberships as well, but only activated one. Could be interesting to refuse/”return” unused gifts to AmEX?

  • smedleyb

    On the other hand, if companies like Duke Power, Dupont, and Boeing can go years without paying any income taxes on billions in earnings, you would think the accounting geeks at Amex could find a way to circumvent these 1099′s for the benefit of their customers. There are literally dozens of similar promos offered by other financial services companies that have not generated 1099′s. The idea that Amex is just following the letter of the law is silly, since the law is inherently vague on this issue.

    What companies like Amex and Citigroup are doing is muddying the tax waters for everybody else. People end up paying income tax on shit they would never in a million years spend their hard earned money on. If Cit wants to value their points at 2.5 cents a mile, I got 300k miles I sell back to them at the bargain basement price of 2.2 cents a dollar.

  • Neil Narvaez

    I’m a tax professional (enrolled agent) and something to look out for if you’re a TurboTax kinda person is that if you enter these 1099-MISC as “Other income”, you could be subject to approximately 14% in self-employment tax!! TurboTax will assume that you earned this other income as self-employed contractor and tax it accordingly. Might not be a big deal for smaller amounts, but if you’re already filing a Schedule C and you enter additional 1099-MISC income, you’ll pay the additional tax.

    Yet another reason to use a tax professional ;-)

    Also to Dan’s comment about IRS agents, the IRS is actually hiring more agents. They’ll never have enough agents to be able to all the audits they want – which would be 100% of returns! lol

  • bluto

    I was going to write a similar comment but Brian Klick said it more eloquently than I could so I’ll stop there.

    I do give kudos to TPG, though, for flagging another points-related tax issue. Highlighting tax issues can be bad for business, so Brian deserves credit for featuring the tax pitfalls in his posts. There are many other blogs out there that have decided to not flag or discuss the tax issues for their readers, and it amazes me that these 1099 issues don’t make it into their priority topics.

  • Anonymous

    I agree with you. But Amex could also be realistic and tell people they might get charged for their worthless Shopfinder membership. I’m pretty sure almost anyone would decline it if they knew they have to pay taxes on $79.

    I don’t blame Amex for playing by the IRS’ rules- I’d just like more transparency on the tax issue when they run the promotion so we don’t get surprise 1099s at year end.

  • Anonymous

    I’m not blaming Amex for following IRS rules. I’m blaming Amex for not being more transparent about 1099s. It was buried in the T&C and if people are going to get substantial 1099s at year end, they should know about it before they do the promotion- not after the fact. Right?

  • Anonymous

    No I wouldn’t worry about general frequent flyer miles or even credit card sign-ups at this point.

  • Anonymous

    This doesn’t affect credit card sign-ups, but probably will for the brokerage/checking account deals :-/

  • jax

    Hey, don’t knock the Blue box on this one! They are a Fortune 500, JD Power & Assoc. Award winning company for a reason. Right here on their Gift Chain rules, it lists the Shop Runner option AND how much ($79) value it holds along with each and every item listed on the gift chain promo at the bottom: https://giftchain.amexnetwork.com/rules

    This is directly below their rule stating: “This Promotion is subject to all applicable federal, state, and local laws and regulations”

    Paying Taxes does suck, but the reality is we are all subject to them each and every day and we need to read and realize what we are signing up for at initiation time. If someone doesn’t take the time to read up a bit before going on a sign up rampage, then shame on them. TPG is pointing out good deals as is the purpose of this blog, but at the end of the day we each need to remain accountable for that which we sign up for in my honest opinion.

    Ever get a bonus at work? And had it be taxed for nearly 1/3 of the actual payout value? This is the reality of our tax structure. Amex is just following the guidelines laid out in the govt. politics of it all.

  • Jo

    @smedleyb

    If you win money at Vegas, the casino will report your earnings. If you dont want to report income, you should NOT deal with any big corporation which has CPA and the whole legal dept advising them on government reporting requirements.

    Bottom line is: if you make money, that amount is SUBJECT to tax.

  • Andy

    This is happening because Amex made a decision to claim and over-value these “gifts” as business expenses on their balance sheets to reduce their own tax liability. That is why they are sending out 1099s. They are hosing their best customers to get a little money in their own pockets. They should totally be blamed…and punished…otherwise others will surely follow. This has nothing to do with the IRS.

  • Tovah

    The shopfinder membership is completely worthless.

  • Anonymous

    wow, i wish i would have spoken with the same rep you did. I called twice and got the same answer each time: one registration per human being, regardless of the quantity of cards.

    at the time, i would have liked your answer better because I have 7 amex cards, the wife has 5 and we have a bunch of AUs that participated as well.

    but now, 2 months later and still chasing statement credit, MR credits, missing gifts that never arrived and facebook GC shares that went poof, it’s been a major hassle. Not as bad as United & Cartera’s still ongoing disaster but at the top of the list (so far) for 2012.

    I do hope they bring it back again though. It was very lucrative.

  • Tina

    I agree–ShopRunner was a worthless prize. I won it, and will never use it. So yes, if I had known I might receive a 1099 for $79, I would have declined it. I submitted my taxes just today, so I hope I don’t receive a late 1099.

  • David Lichtman

    If you disagree with the stated value of any of the prizes on the 1099, you can revalue it at “market value” if you can provide evidence of the actual market value.

    Also, this is only going to impact people who had >$600 in “winnings” as that is the threshold for Amex to report it to the IRS. It is NOT the threshold over which you owe taxes (you owe it on every dollar), but the IRS won’t know about the winnings if Amex doesn’t tell them about it.

  • PanAm

    Prizes and gifts like these are subject to tax, everyone knows or should know that, even if Amex hadn’t stated so in their footnotes. And Amex did alert people to their possible tax liability. Why complain about something being “buried in the fine print” especially when it’s common knowledge in the first place? One can always contest the valuation of the 1099 and any accountant can advise you on that.

    Besides those of us in the mileage game are adept at maximizing our value out of programs by knowing the ins and outs of their fine print. It works both ways. I just don’t see the issue here.

  • Anonymous

    What SHOULD this type of income be classified?

  • Danny

    Sorry Brian, but I have to disagree. AmEx designed a competition that would quite easily “award” people more than one of the same prize when that prize can only be redeemed once per person (ShopRunner). A reasonable user of the Gift Chain would not have known what the retail value of ShopRunner was, nor would they have known that it was almost always the first prize won on any AmEx card. Perhaps AmEx should have thought through the implications of creating a contest whereby the most likely outcome for a user with more than one AmEx was an unnaturally large tax bill that did not properly reflect the reality that one user could only use one ShopRunner subscription for the year.

  • jax

    So, does the definition of a “reasonable user” mean someone who just clicked through the rules and ignored the fine print as was laid out fo anyone who signed up for their promotion in the first place??? https://giftchain.amexnetwork.com/rules

    To me this does not sound like a reasonable user, more the definition of something else… i.e. perhaps someone not taking any responsibility for the implications of their own actions.

  • jax

    * for not fo

  • Michael

    Pointsguy, why are you so sure that credit card sign up bonuses won’t soon be taxed also?

  • Anonymous

    Because the IRS rules don’t apply to rebates on spend, which is what credit card bonuses are. Plus, credit card companies have a huge amount of lobbying power and that would fundamentally shift the entire credit card system in the US. Anything is possible, but I don’t see any fundamental changes happening anytime soon.

  • Michael

    Man I hope you’re right but two things make me unsure: the huge amount of debt the government has built up and the Obama administrations willingness to ignore rules and laws whenever it will benefit them.

  • Anonymous

    I don’t think taxing all frequent flyer miles would be an issue any political party wants to get behind- especially in an election year. Though I suppose crazier things have happened.

  • studd

    yea i know that about the rules, but really this is more like AMEX off loading EPA superfund sites or other liabilities. Really what AMEX did here was promise some nice gifts but mostly off load crap that they got for free and most likely as part of some financial scam they were running. Maybe AMEX was behind the financing for shoprunner?? Does anyone know for sure?

  • studd

    Maybe AMEX was behind the financing for shoprunner?? Does anyone know for sure?

  • http://www.travelandcredit.com/ Travel and Credit

    Prizes are generally always taxable and always a write off for the company involved, which is why they do it (like yourself, right?)… I agree with other commenters that (unfortunately) it should be assumed tax will be owed on prizes, especially from major banks who can’t afford to dodge tax laws. Still a bummer, but definitely not a surprise.

  • Pingback: Relax! Most Miles & Points Are NOT Taxable | Million Mile Secrets

  • searay540

    WSJ weighs in on the tax issue and FF miles http://bit.ly/x7pIM4

  • Pingback: TPG on Fox Business News: The Taxation of Frequent Flyer Miles and Points | The Points Guy

  • Pingback: Amex Issues Revised 1099′s for Unclaimed Gift Chain Prizes | The Points Guy

  • jz100

    American Express is the one that should be paying the taxes on this.