Everyone loves free things, especially free money. I actually get offers for it all of the time. I’m sure you’ve seen the advertisements on websites or in your mailbox: Open an account with ABC Bank and Get a gift or $X FREE! This is a popular way for banks to get new inflows of cash, by offering people “free” money to make the switch like PerkStreet Financial did at the end of last year with their $25 bonus. Some will even offer you a bonus for referring new accounts to them. The problem is that these bonuses are not “free” money in the truest sense of the word; they come with a price tag attached to the offers.
In the simplest method of explaining, these payouts are all considered to be interest payments, which are, you guessed it…taxable income! You will get a 1099-INT at the end of the year, which will need to be reported on your Form 1040 Individual Income Tax return. That means you are essentially getting the amount of the bonus less your year-end tax rate since you will be paying income taxes on all or a portion of all of the interest you receive (depending on your individual tax situation).
Not only are these bonuses taxable, but you may have to do some work to get them as well. Chase, for example is offering a $125 cash bonus for opening a new Total Checking account, but there are catches if you want to avoid the service fees:
*Service Fee — Chase Total CheckingSM has no monthly Service Fee when you do one of the following each statement period: 1) have at least one direct deposit of $500 or more post to your account (two or more direct deposits that add up to $500 or more do not qualify) or 2) keep a minimum daily balance of $1,500 or more in your checking account or 3) keep an average balance of $5,000 or more in qualifying accounts with Chase. Otherwise a $12 monthly Service Fee will apply ($10 monthly Service Fee in CA, OR and WA). Certain restrictions apply, please see a banker for details. The terms of this account, including any fees or features may change.
Bonus/Account Information —Offer not available to existing Chase checking customers. Offer valid through 8/15/11. To qualify for the bonus you must open a new Chase Total CheckingSM account with a $100 minimum deposit of new money (money not currently held by Chase or its affiliates). Also, within 60 calendar days of account opening, we must receive from your employer or the government a monthly electronic direct deposit of your payroll, pension or government benefits, such as Social Security. The bonus will be deposited into your new account within 10 business days after your initial direct deposit is posted to your account. Bonus is not considered part of minimum opening deposit. Limit one checking account-related bonus per customer, per calendar year. Offer not available on account conversions or in combination with any other offer. Employees of JPMorgan Chase Bank, N.A. and our affiliates are not eligible. Checking account must remain open for a minimum of six months or the bonus will be debited from the account at closing. Account is subject to approval. Bonus is considered interest and will be reported on IRS Form 1099-INT.
You need to completely switch to Chase so that you can satisfy their one direct deposit > $500 per cycle, unless you have another source of income aside from your paycheck that occurs each month, or keep your balance over their $1,500 stated limit in the new account, which is a fairly substantial amount if you were only using this new account to get the bonus money.
HSBC makes it even more difficult by jacking up the minimum deposit and balances to avoid their monthly fees in order to claim a $100 Amazon gift card:
To avoid a monthly $15 maintenance fee for Plus Checking, you need to maintain $15,000 in total combined balances including personal deposits and investments. Business owners may use their commercial deposit and investment balances to qualify for a personal Plus relationship
Offer valid when you begin or upgrade to a new Plus relationship online and deposit a minimum of $25,000 in new money to any qualifying personal accounts between July 25, 2011 to September 16, 2011. New money is defined as funds or positions not previously held by any member of the HSBC Group over the past consecutive six months, and must be in addition to existing deposit balances. The Annual Percentage Yield (APY) and balance for Plus Checking, which is accurate as of 08/04/2011, is 0.01% APY on balances of $5.00 or more. APY is variable and subject to change. Charges and fees may reduce earnings. Business owners may use their commercial deposit and investment balances to qualify for a personal Plus relationship, but these balances cannot be used to meet the new money requirements. Qualified customers will be notified via mail within 90 days of opening an account; notification will include instructions for redeeming gift of choice. Limit one gift per customer. New and existing Premier customers are not eligible for this offer. This offer cannot be combined with any other offers or promotions, is nontransferable, good while supplies last. Promotion may be modified or withdrawn at any time without notice. Any gift not redeemed by November 18, 2011 will be forfeited. The cost of the gift will be reported on IRS Form 1099. Plus relationship must remain open for a minimum of six months or value of gift will be deducted from account proceeds at closing
And, if you want to participate in the Capital One InterestPlus Online Savings account bonus, you not only have to have a $10,000 balance as of August 31, but you also have to keep the account open for an unspecified amount of time afterward since their disclosure doesn’t exactly give you an exact time at which you will receive your bonus:
You will receive a $50 bonus if you open a Capital One Bank InterestPlus Online Savings (IPOS) account online only, enter the offer code at the time of account opening, and have $10,000 or more on deposit on 8/31/2011. You are eligible for this promotion only if you received this offer from Capital One. This account must be your first account with Capital One Bank. This account must remain open 4-8 weeks after 8/31/2011 during which time the bonus will be deposited into your account. The bonus will be reflected on your monthly statement and will be included in your year-to-date interest and year end tax reporting. This offer cannot be combined with any other offers.
Granted, these aren’t the most difficult hoops to jump through, or the most unfair terms to comply with, but it certainly makes things a little more difficult. The interesting part is being able to swallow the large deposit requirements for such small rewards (relatively speaking) with the HSBC and Capital One accounts, but that is how they plan on hooking you. Their goal is to put you in a position where you will have to invest such time, energy and money that you will not want to simply close out your new account at any of these institutions, and they will benefit from having your new cash to loan out and earning them interest while transferring little or none of that interest back to you.
Guess we can blame it on the new economic landscape, but don’t you wish we can go back to the days of referral bonuses, decent interest rates, and no hoops to jump through for a free bank account (yes, I know that many online banks are free, but I’m not talking about them right now).