Bank Bonuses Are Taxed (Unlike Credit Card Rewards)

Just the Tip:

Bank account bonuses are taxable income that you’ll pay taxes on and receive a 1099-INT for, while credit card signup bonuses fly completely under the IRS radar. Always calculate bank bonuses at their after-tax value based on your tax rate when you’re determining their true benefit.

Banks are practically begging for new customers with fat cash bonuses right now. Chase is offering $300 for opening a checking account. Bank of America dangles $200. The marketing is everywhere, and the offers look irresistible. But here’s what those glossy ads don’t mention: the IRS will grab a chunk of every dollar.

When you earn a bank bonus, the IRS treats it as interest income. You’ll receive a 1099-INT form at year-end for any bonus $10 or higher, and that money gets added to your taxable income. If you’re in the 24% tax bracket, that $300 Chase bonus becomes $228 after Uncle Sam takes his cut. The $200 Bank of America offer? You’ll pocket $152.

Credit card bonuses work completely differently. That 80,000-point welcome bonus worth $800 in travel rewards points? Tax-free. Cash back bonuses? Also tax-free. Here’s the key: you typically get these bonuses after spending a required amount – say $3,000 to $5,000 in the first three months. The IRS treats these as rebates – essentially discounts on purchases you’ve already made. Think of it like getting a manufacturer’s rebate on a purchase. You spent $4,000 to earn that $800 bonus, so the IRS views your reward as reducing your net spending to $3,200, not as additional income. Since you’re not actually receiving “new” money but rather getting money back on purchases, there’s no taxable event. No 1099 forms, no tax headaches, no reduction in value.

Most people have no clue about this difference when they’re attracted by those eye-catching bank bonus campaigns. The marketing focuses on the headline number – “$300 BONUS!” – not the after-tax reality. Meanwhile, credit card companies can honestly advertise their full bonus value because you actually keep it all.

This doesn’t mean you should avoid bank bonuses entirely. If you’re genuinely in the market for a new checking account and would meet the requirements anyway, a taxed bonus is still free money. Just factor in the tax hit when comparing offers, especially if you’re in a higher tax bracket, and don’t let the gross amount fool you into thinking it’s more valuable than untaxed credit card rewards.

Bottom Line:

Always calculate bank bonuses at their after-tax value before taking the bait, and remember that credit card bonuses give you exactly what they promise – no tax surprises come April.