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Are Taxable Frequent Flyer Miles in Your Future?

Are Taxable Frequent Flyer Miles in Your Future?

You probably never paid a penny in taxes for the frequent flyer miles you’ve earned. I certainly haven’t.

There’s only one exception to the no-tax-on-miles rule, as it’s been generally understood. If you win frequent flyer miles in a contest or sweepstakes, the sweepstakes host publishes an estimated retail value of the miles in the terms and conditions, and sends a 1099 form to the winner and to the IRS, which considers the prize’s value to be tantamount to extra income and taxable as such.

On the other hand, there are no tax consequences for earning frequent flyer miles for day-to-day transactions, such as shopping, traveling, and so on.

But what about the miles that banks award as incentives to open checking and savings accounts? Or the miles that credit card issuers routinely give to consumers as an incentive to apply for their cards?

Until recently the prevailing assumption on the part of both mileage-earners and tax experts was that such sign-up bonuses were not taxable.

This year, however, as reported by the Los Angeles Times, Citibank began sending 1099s to customers who had received mileage bonuses for opening savings or checking accounts. And of course, copies of those 1099s were also sent to the IRS.

Citi’s move—which it claims is in response to IRS guidelines—raises a host of questions and concerns. Among them:

  • Citi valued the AAdvantage miles awarded for opening checking and savings accounts at 2.5 cents each. While it’s possible to get that much value for the miles when redeeming them, my estimate of the average value of a mile is around 1.2 cents. And certainly Citi paid American much less than 2.5 cents apiece for the miles. In fact, the vagaries of valuation are one of the issues that the IRS has historically cited as an insuperable barrier to taxing miles.
  • What’s the difference between earning miles for opening a bank account and miles earned for signing up for a credit card? If the former incentive is taxable, why isn’t the latter? With the marketplace awash in lucrative credit card sign-up bonuses, this question is hardly academic—hundreds of thousands of consumers would be affected if credit card bonuses were treated like bank account bonuses.
  • And if bonuses for financial services transactions are taxable, wouldn’t that suggest that miles earned for other transactions were taxable as well?

According to David Lazarus, who wrote the L.A. Times story, the IRS considers the bank account bonuses to be "income miles," while other bonuses are "rebate miles." The logic of that distinction eludes me.

So, what to do? This is what Eva Rosenberg, my tax advisor and publisher of TaxMama.com, advises: "ANYTIME you get a 1099 form of any kind, report it on your tax return wherever the IRS computer expects to see the income. In this case, on Line 21, Other Income. Then, if the income is not taxable, deduct it back out, and include a statement explaining why it’s not taxable."

I’m sure that’s solid advice. But I’m equally sure that any policy that causes so much confusion, and that requires taxpayers to report, back out, and then explain themselves, is a policy that needs to be rescinded.

Apparently Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, agrees. He appealed directly to Citi chief Vikram Pandit to "end this gratuitous practice. The Internal Revenue Service (IRS) clearly stated that frequent-flier miles are not subject to income tax."

Since there’s obviously disagreement as to the interpretation of the IRS’s rules, frequent flyers can only hope that he and like-minded politicians will take the no-tax case to the IRS as well.

Reader Reality Check

Did you earn miles for opening a new savings or checking account in 2011? Did the bank send you a 1099 for the miles?

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  • R Cohen

    The insidious aspect of this is that Citi has deducted the value reported on the 1099′s from THEIR income ( as a cost of doing business), shifting the tax burden to the consumer. Not only did they not pay out that amount, but the miles recipient may never reap ANY value from these miles.

  • BOYCOTTCITI

    i think you miss the issue here – you are a powerful website – let people know NOT to open a citibank account and if they have one to change to another bank (a local bank) or at least BOYCOTT Citi – i received an account and a 1099 but NOT the miles! even worse, when i called Citi they were rude, really rude! In addition, as soon as the account was established they changed the minimum and started charging $20.00 a month. BOYCOTT CITI – not because they adhered to IRS rules, but because they deceived people who signed up about the consequences (a 1099), and then committed consumer fraud again by changing the account rules. BOYCOTT CITI !

  • Robert lanza

    Tim,

    Thanks for the update. I understand the importance of including the 1099-M “earnings” as Other income on my 1040. But could you help your loyal and victimized readers out by also telling us where to deduct the amount out. Specifically, what line would the off-set be entered on. I know that you do not give tax advise, but your source, Eva Rosenberg’s guideance is much appreciated. Thanks, R. lanza

  • D Renz

    I have yet to figure out how miles are income under any scenario other than a sweepstakes win. Is the $0.25 that I save on my bread when I use a coupon at Kroger taxable income? How about when my 5th sandwhich at my deli is free? Of course not. It is a discount to the price I am paying for the bread or the sandwich. Miles are just a delayed discount, not income.

    Now if my miles were earning additional “interest miles” while sitting in my account that would be a different story.

    Politicians have been smart enough not to try and tap miles as a revenue source. Citi is just using this as another tax dodge.

  • ken

    Oh yea and those miles arent even your the are the airlines miles. So how can you pay taxes on something that isnt even yours?

  • Robert lanza

    PS:

    Tim,
    In preparing a valid arguement for the IRS and a more reasonable valuation of 20,000 AA miles, I requested some quotes from airline brokers. I got only 2 offers to buy miles and they were at $0.01 and $0.011 per mile. However, no one would buy 20,000 miles and would only consider buying lots of 110,000 and up.

    As a result, the fair maket value of 20,000 miles is zero and as a supplement to an existing mileage portfolio, it seems to have a cash value of about 1 cent per mile.

    While fliers desperate to top off accounts can and do pay $0.025 per mile to American, you cannot receive cash at that rate as a seller. Fair market value must consider both the buy and sell side (bid and ask) to arrive at a fair valuation. It was an arrogant move on the part of Citi to saddle customers with this tax liability. There needs to be a public out cry

  • Steve

    R Cohen hits on why it’s to Citi’s advantage to value the miles at 2.5 cents per mile. If they send a 1099 at 2.5 cents per mile, they’ve got justification for deducting that promotional expense at 2.5 cents per mile, even though it cost them a lot less than that.

  • DaveS

    It does look like an accounting trick by Citibank. Overvalue the miles, issue 1099s, and reduce their own taxes. I would definitely not want to bank with them. Credit cards are a separate issue, since I don’t believe anyone has received a 1099 for a credit card bonus. But I think that the argument that the airlines insist that they, not the customer, own the miles, is a pretty strong one for some lawyer to challenge Citibank with.

  • Ray

    Or, you could also file your taxes using Turbo Tax, then claim ignorance and ineptness at filing your return correctly, just as Timothy Geithner did. And yet, he STILL got the job as Treasury Secretary. If Timothy Geithner can get away with it, then SO CAN WE!

  • theSuperStar

    I’m glad I don’t back with Citi.

  • Ken

    I wouldn’t mind if I could pay my taxes to the IRS in miles.

  • TM

    Why does everyone think Citibank paid less than $0.025/mile? The miles my hotel buys to give to frequent guests costs $0.03/mile

  • Robert

    Remember what happened to Bank of America and their fees. Let your voice be hear by CitiBank and jump on this petition:

    http://www.change.org/petitions/citibank-reissue-1099-misc-forms-to-customers-who-opened-citibank-accounts#

  • Carey

    I opened an account with Citi and got a 1099. I declared the outrageous value they put on the 1099 and VOWED to NEVER AGAIN DEAL WITH THEM. They’re slitting their own throat by this approach.

  • Mark

    Citi’s tax liability has NOTHING to do with issuing 1099s. It will deduct whatever it paid for those miles as a cost, which reduces profit. That deduction will be valid regardless of any 1099 form.

  • Marc

    I’ve been hearing about this every tax year. The first time taxing FF miles was proposed was 1992.

  • Kevin

    If I never use the miles, can I write them off as a loss? I’m sure it would be depreciated since the amount of miles to trade in to get anywhere continues to go up.
    Would they be considered Capital Gains if I use those miles in business whether or not I generate or lose revenue?
    These are the silly things the tax code and banks force you to ask when the proverbial can of worms is opened.

  • FRUSTRATED

    When the airlines tax their own employees for commuting pilots and flight attendants not living in their hub cities, and the lifetime free travel while employed or retired, not to mention free parking at any airport, then they can worry about taxing the rest of us. I won two airline tickets on yahoo and got a 1099.

  • http://profile.yahoo.com/FVRCNWOITQBJYSNJ7NN73GKTN4 TXSteve

    Uh hello, it’s a tax deduction for Citi so of course they report it and at much higher than what it is really worth.

  • http://profile.yahoo.com/FVRCNWOITQBJYSNJ7NN73GKTN4 TXSteve

    Uh hello, it’s a tax deduction for Citi so of course they report it and at much higher than what it is really worth.

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