What To Do With Referral 1099s

The ToP Facebook group is on fire with questions about what to do with referral 1099s. I wrote about this earlier in the week, that banks were sending out 1099s for referral bonus points. This is because the points earned from refer a friend bonuses are not from spending. That is what makes normal points and welcome offers tax free, the fact that they are considered a rebate on spend.

Because of so many people getting these 1099s, and many for the first time, we are seeing proclamations and irrational thought abound. People are saying they will never do referrals again or saying the points are not worth the cost. Because of all of this I need to get back up on my soapbox with a mini rant. This after I just got down off the last one for welcome offer tomfoolery.

***Time to cover my butt with the disclaimer that I am not a tax professional and this is not financial advice.

Yes, Referrals Are Still Worth It

We need to stop the buffoonery (A++ for tomfoolery and buffoonery in one article if I do say so myself) about referrals no longer being worth it. While it is a lot better when they were tax free years ago, that isn't really the question that needs to be asked. The proper question is, does the value still make sense when accounting for taxes?

Let's say you received a 1099 from a bank for $1,000 because you earned 100,000 points in referral bonuses. They have been essentially valuing all points at 1 cent a piece with these, a subject we will go into more depth on in a bit. Back to these calculations first though.

So we have a $1000 1099 for 100,000 points that will cost the average American $250 in taxes (25%). Let's look at that equation this way, if someone handed you a free $1,000 would you be mad if you had to give away $250 to get it? Probably not.

This calculation isn't even that bad though, at least not if they were points from transferrable currencies. That is because those points are worth $1,500 or $2,000 towards travel if you use transfer partners. Since you are only paying taxes on their listed cash value, the effective tax rate is more like 12.5% – 16.66% ($250 / $1500 or $2000 in travel value).

There is one more way we can look at this, in case either of these examples isn't quite hitting home. If someone offered you the the opportunity to buy 100,000 transferable currency points for $250, would you do it? The answer to that question is all you need to really know because that is what you are essentially doing.

Get Your Cake & Get To Eat It Too

If cash strapped then you can somewhat easily cash out most of the transferrable currencies to pay for the tax bill. Shave 25,000 points off the pile to liquidate for $250 in cash. Once you pay the tax man you get to walk away with 75,000 points scot-free. It is really that simple.

What If The Points Are Not Worth 1 Cent Each?

There is another side to this we need to discuss as well. What if you referred for Hilton Honors or Marriott points though? These are not worth 1 cent each and are closer to half a cent or seven tenths of a cent etc. That changes things when the bank sends you a 1099 for 1 cent each. You would now be paying $250 in taxes for 100,000 points that are only worth $500 – $700 in travel too you. Less of a no brainer deal.

You can get with your tax professional and see if you can adjust the 1099 down to their actual value. They should be able to walk you through that process and if it makes sense or not. Going forward, you can decide to not refer the cards that earn these type of points. Instead focus on currencies where you get over 1 cent a piece. That would be most airline's miles, transferrable currencies and things like Hyatt points etc.

The Other Interesting Debate

One other thing that people may want to bring up with their tax professional, at least with Amex Membership Rewards points, is that their true cash value is not 1 cent per point. If you redeemed them as a statement credit you would only get $0.006 per point. Should that be what the 1099 is actually valued at? Something to run by your tax professional.

What To Do With Referral 1099s: ToP Thoughts

Hopefully this quells some of the consternation out there over referral 1099s. It should also give you some more ideas on what to do with your referral 1099s. Overall, referrals are still a positive thing in the vast majority of cases. You may want to focus on earning the most valuable points via referrals going forward though. If you need to cash out some points to mentally make it okay with you then do that. Otherwise, realize that they are still a gift and you come out way ahead. If you received 1099s for thousands of dollars then you likely got close to double that in travel covered. All for less than 20% in effective taxes, your only real cost of acquisition. That is a win every day and twice on Sunday.

If you still want to make irrational proclamations that refer a friend bonuses are not worth it because you need to pay taxes on them, great! It just means more points for the rest of us.