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