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Paying Taxes on Points: Citibank Sends Tax Forms For Some Checking & Savings Sign-up Bonuses

by on January 31, 2012 · 45 comments

in American, Citi, TPG Contributors

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New TPG Contributor Series: Financial and travel writer Jason Steele investigates recent reports that Citibank is sending tax forms to customers who received American Airlines miles for opening bank accounts last year.

Are miles going to be taxable? Citibank raises the alarm among customers by sending them 1099 forms for bonus points earned by opening checking and savings accounts.

Update: Check out the bottom of this post for an important update from the IRS that came out after this original post was written.

The Taxation of Points and Miles

This time of year, most of us are opening our mail boxes to discover tax forms showing our income earned from employers and investments as well as any tax deductible contributions to home mortgages and student loans. What we don’t expect is a form from an airline or a bank saying that the points or miles that we earned are taxable income. Yet this is exactly what happens to some Citi customers each year, and each time it does, it sends shock waves throughout the close-knit community of serious points and mileage collectors as well as amateur enthusiasts looking to collect a few extra miles through savvy personal finance.

Beware The 1099

Fears were stoked yet again earlier this month when Citi sent out IRS 1099-INT forms to banking customers who earned American Airlines miles when they opened checking or savings accounts. It’s important to note that it did not send 1099’s to customers who’d earned miles by opening credit cards. However, this tax grab seems a bit sleazier since the folks who were solicited to open new accounts were Citi AA cardholders.

A TPG reader sent in the 1099 Citibank sent him. Did you get one too?

According to this report in the Los Angeles Times, Citi is claiming that these miles are the equivalent of prizes, and as such, are subject to taxes. Worse yet, it claims that each mile should be valued at 2.5 cents.

Granted, the AAdvantage program has some great domestic and international award redemption possibilities, but 2.5 cents per mile is seen by most as an excessive valuation. For instance, you could easily receive more than $2,500 dollars in value if you redeem 100,000 miles for a business class ticket to Europe, but barring a last-minute redemption, it is difficult to find a 25,000-mile domestic coach award that could not have been purchased for less than $625. That highlights the very nature of points—that their value is extremely difficult to pin down. So why should individuals be on the hook for them?

The IRS Version

With the exception of some executives at Citi, there seems to be unanimous agreement that loyalty points and miles do not represent taxable income. Except for points that are converted to cash or other income, the IRS considers promotional points and miles to be in-kind promotional benefits and treats them as rebates, unlike Citibank, which considers the miles it distributes to be prizes, so the agency has stayed out of the points game.

In its official position on points, the IRS says that due to the administrative murkiness of valuing points, whether they’re used for business or personal benefits, and a host of other unresolved issues, it has not pursued a taxation policy on points, and for the time being, has no plans to do so. Nor will it go after taxpayers who do not declare points and miles on their income tax forms. That said, it could develop such a policy at any time, so consumers should be aware of any rule changes.

In the meantime, Ohio Senator Sherrod Brown, the chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection wrote an open letter to Citibank earlier this week telling them to stop reporting frequent flyer miles as taxable income arguing that it’s putting even more of a strain on financially strapped families in our down economy, and says, “given the IRS’s ruling, why is Citibank sending its customers 1099 tax forms? Reporting frequent-flier miles as taxable income is inconvenient to consumers, raises their anxiety unnecessarily, and is not required by law.” So at least consumers have some powerful friends on their side.

What Can Should Do

The first thing you should do is consult a licensed tax adviser. I am not one, so this post is merely a roundup of information to get you thinking about options.

Here are some things you research further:

-Call Citi and dispute the amount at which they value the points. They may relent. Even if you didn’t get a 1099, let Citi know you are not happy with this – they have gotten a lot of bad press around it, so their customers need to keep up the heat.

-If they do not, you can call the IRS and get a form from them disputing the valuation of the points and send it to Citi. They will have to respond, and might drop the 1099 altogether.

-If that doesn’t work, when you pay your taxes, only include the amount you value the points at along with a letter of explanation to the IRS, but keep the original 1099 for your records in case the IRS notes the discrepancy.

What Is Citi Thinking?

This year and in years past, Citi is only sending out 1099 forms to those who earned 25,000 miles or more by opening a checking or savings accounts, not those who have taken advantage of one of their numerous AAdvantage credit card offers, most of which far exceed 25,000 miles. Not only is Citi the only institution that reports bonus miles as taxable income, but it is unclear why Citi seems to only find bonus miles awarded to checking and savings account holders taxable, but not miles received from credit card sign-up bonuses or spending. However, this kind of inconsistency on Citi’s part is nothing new to mileage seekers.

In short, if Citi can’t even enforce their own terms consistently, it is unsurprising that it would have problems properly complying with IRS regulations. For now, Citi AAdvantage credit cards still offer some great sign-up bonuses, but without the prospect of receiving an IRS 1099 form. As for their sign-up bonuses on checking and savings accounts, those who don’t enjoy wrangling with the IRS should pass on these offers for now.

Tell Us About It

Did you receive a 1099? Have you contacted Citibank or the IRS? Tell us about your experience and what happened in the comments below.

Update: This morning the Los Angeles Times published a follow-up by the same writer, David Lazarus, with some more (and more unsettling) answers from the IRS.

IRS spokeswoman Michelle Eldridge dropped this bombshell: “When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law.” But she also said that miles received for using a credit card or credited to a passenger by an airline for taking a trip would be classified as rebates, and so not taxable.

There are a few disturbing leaps in her statement, the biggest of which is her use of the term “financial account,” which opens up the door beyond just the checking and savings accounts that Citi customers were 1099-ed for, but also to investment funds like Fidelity and TD Ameritrade that award bonuses, as well as possibly credit card sign-up bonuses.

The other troubling implication has to do with the value of these points since, Eldridge says, “the amount of income to the taxpayer is the value of the property received, not the cost that the business paid to acquire the property.” So despite the fact that Citi probably paid a fraction of a cent per mile it purchased from American Airlines to distribute to customers, it can claim each mile is worth 2.5 cents on the 1099’s. How they came up with that number is a mystery, but certainly the tax deduction at this value that the bank is able to claim is part of the equation.

That just might be the saving grace for taxpayers, though, since points valuation is so murky and they can be redeemed for any number of items or benefits and wildly varying values. It’s going to take the IRS a long time to figure out just what to do about taxing these points and whether it’s worth the administrative and legal hassle.

Lazarus and the CPAs he talks to all admit that this issue is confusing even for tax professionals and the IRS, so there are still no definitive answers and there likely aren’t going to be for a long time to come. (Updated by TPG Editor Eric Rosen)

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

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  • http://www.passportplaylist.com/ David

    Very helpful post!

  • Pingback: Taxes on Points/Miles? Fugghedaboutit!

  • Nickfromct

    The way I would handle a 1099 from Citi would be to leave it off my tax return entirely. This may generate a form from the IRS saying you forgot this 1099. At that point in your answer to the IRS would be that this 1099 represents bonus miles from a credit card and that the IRS states these are non-taxable. Send in a copy of the pertainent IRS tax code.

  • http://twitter.com/WanderngAramean Seth Miller

    Bad news for the assertions you’ve made in the post here that the official position of the IRS is to mostly ignore the issue. They’ve issued a clarification this week suggesting that sign-up bonuses on “financial accounts” are, in fact, taxable, whether they be points or a toaster.

    Even worse, by using the term “financial accounts” in the statement it opens the door to investment and CC accounts – commonly churned for huge sign-up bonuses – being held to the same standard. That’s not necessarily a good thing for consumers, but it does suggest that Citi wasn’t completely off their rockers when they sent the 1099s.

  • Brent

    I won a contest on Facebook in Dec 2010 where SPG gave me 90,000 points (to cover two plane tickets and a few nights at a hotel). They asked for my tax info before giving me the points and said I would get a 1099 for the 2011 tax years since the points would be paid out in 2011. I have yet to receive a 1099, but was curious if these were considered “promotional points.” The company could have just paid out of pocket for the room and flight.. and then the prize would have a real cash value. I have a feeling they will base the points value on the rate a normal person would pay Starwood to purchase them directly. I haven’t even used all the points yet, just curious what your opinion is on this situation?

  • Eric

    Great comment, Seth. There was a follow up in the LA Times this morning here: http://www.latimes.com/business/la-fi-lazarus-20120131,0,1866043,full.column. That seems to be where Boarding Area got its info from.

    As you point out, it sounds like the IRS is considering taxing those miles Citi issued 1099′s for, though they just communicated that through a spokesperson rather than in an official set of policy guidelines. The two pieces of bad news are, as you point out, that the IRS will consider taxing “financial accounts” that could include investment and credit card accounts, and valuing the points at whatever level banks state they are.

    However, that’s going to raise a lot of issues, since points valuation is still so inconsistent and they can be redeemed for any number of benefits. I have a feeling this is going to be a long, drawn out fight before we learn whether people actually will be paying taxes on the full spectrum of points, and unfortunately Citi customers seem to be the ones caught in the middle.

  • smedleyb

    Just another reason why I find points promotions beyond simple sign up bonuses/spending for points to be highly suspect. I didn’t do the Citi deal (couldn’t set up direct deposit — dodged a bullet there) but I switched my energy delivery company to Energy Plus for a few extra Southwest points, and watched my electric bill surge by 60% for two straight months. Buyer beware, as always.

  • smedleyb

    Great, because the people working their asses off to accumulate a few extra points to take the kids to Disney or the wife to Hawaii for that honeymoon they never took are obviously rolling in the dough in the first place. Because Bill Gates really cares how many points he just got from Capital One for his monthly spend.

    Imagine the middle class family who worked the system for a million points in fiscal 2012, only to get a 1099 for $25,000 from their CC providers and have to fork over $5000 even if they only redeemed about $3000 worth of points. I’m depressed just thinking of all the good people on these boards and elsewhere this will crush financially if Seth’s worst case scenario — all financial accounts — comes to fruition.

  • bluto

    Do you randomly leave off 1099s or other sources of income that you don’t like to report to the IRS?

  • Shaul13

    I got from chase bank a bonus $150.00 for opening a checking account during year 2011, just got a w9 for $150.00

  • Brent

    Just curious, would people be willing to pay taxes on award tickets when they are redeeming? That way there would be a cash value that is based on what the award ticket would cost if purchasing out of pocket and not basing the value of the miles on what it would cost a person to purchase them directly from the airline.

  • TaxationIsTheft

    If you leave it off, guaranteed you will get an IRS notice of proposed deficiency about 18 months later and then you will be fighting an uphill battle. (You will be fighting an uphill battle in either case).

  • jd

    It’s not a “mystery” where Citi got the $.025: AA.com sells them at that price. Voila, mystery solved.

  • StM

    It’s not really the same thing – CC bonuses and points versus the 1099′s for the opening of accounts.

    CC bonuses and points require a spend of some kind, so they can be treated as a rebate as a purchase and are not generally taxable.

    A bonus for opening a bank account, requires the deposit of $XYZ amount but NOT a spend. So that’s why Citibank has been sending out the 1099′s and may be taxable.

  • Eric

    A few years ago, I was getting rebates of commissions for stock trades I made with E*Trade. The rebates for the year amounted to thousands of dollars. I did not report this, as it was not income. It was a partial rebate of commissions- what I considered to be a discount. E*Trade called them rebates too. Well, they reported it to the IRS as income. Several months after I filed my taxes and received a refund, I received a letter from the IRS stating that I owed a few thousand dollars for not reporting this income. I wrote them a letter showing where E*Trade called it a rebate program, and I referenced the IRS’s own publication which stated rebates should not be reported as income. A few weeks later I received another letter from the IRS which basically said, “never mind,” and I was off the hook that I shouldn’t have been on in the first place.

  • Conor

    Hey guys – here’s another (unfortunate) data point.

    I did the Amex Gift Chain promo on each of my Amex cards. I just received a 1099 on my “earnings” from that promotion.

    Awards were given in the form of gift cards, statement credits, and gifts to share with friends – make a purchase of $25 or more from their selected retailers, you might win a $50 Amex gift card.

    It looks like my 1099 reflects EVERYTHING. Statement credits, Amex gift cards, and Amex gift cards that I “won” to share with friends on facebook.

  • bluto

    ThePointsGuy should really take down or edit the original post. I think the original post is very close to giving readers exactly the incorrect advice on this taxation topic. In light of the IRS clarifications in the last 24 hours, these bolded statements are pretty far off:

    “With the exception of some executives at Citi, there seems to be unanimous agreement that loyalty points and miles do not represent taxable income.”

    and

    “Nor will it go after taxpayers who do not declare points and miles on their income tax forms.”

    For readres who don’t make it all the way to the bottom, they won’t see the IRS update explaining that the original post is basically wrong.

  • Anonymous

    You are wrong. AA sells 1,000 miles for $29.50. For the mathematically challenged, that’s actually 2.95 cents per mile.
    https://buy.points.com/PointsPartnerFrames/partners/aadvantage/container.html?language=EN&product=BUY&CAMPAIGNCODE=AAMktPgDom

  • Anonymous

    I’ll add a bigger disclaimer to the top that there was an update (I was in an all day meeting and just getting to emails now). Even though the IRS commented today, this issue is far from resolved and Citi is still the only bank issuing 1099s for checking accounts- though a TPG reader did report just getting a 1099 for the Gift Chain promo. Not good news.

  • Diamond Vargas

    I recently accepted a Citi offer to open a Citigold checking account with direct deposit in return for 23,500 AA miles. At the time I thought it seemed like a pretty random number, but perhaps the explanation is that they’re looking to avoid criticism in more recent promotions by staying below the (seemingly self-imposed) 25k threshold. Anyone else get a 23.5k offer?

  • Anonymous
  • Anonymous

    Yikes!! Not good news

  • PJ

    THEY ARE ALL IN 1099s: $150 Chase paid me to do direct deposit into my checking account; Wachovia paid me $25 for referring a new account; ING paid me $50 and etc on Black Friday new account Bonu and also other bill payments bonuses by more than a few banks. your best shot is dispute the value of the points I would

  • Swat

    You have to re-read the statement from the IRS spokesperson. It says it can be a taxable situation. That is not the same thing as saying definitively “frequently flyer miles are taxable.” They intentionally answered in vague language. The IRS could never handle the administrative burden of calculating values of frequent flyer miles.

  • PJ

    phew I hope not on the $25 statement credit received on the Sat after thanksging as supporting local small business credits.. I got 7 X 25

  • Not Amused

    This is silly. Receiving points is not a taxable event. The taxpayer is not receiving any financial gain. If the IRS wants to tax points, they should tax the points on redemption when there is a readily ascertainable value to the benefit conferred to the taxpayer.

    Hold off on filing your tax returns until closer to the deadline. At that point, consult your CPA or tax attorney. Hopefully, this issue has been resolved and the IRS has realized the folly of this statement.

    Treasury Circular 230 Notice: Opinions or statements contained in this document which relate to any federal tax matter are not intended to be used, and cannot be used, by a Taxpayer to avoid penalties that may be imposed on the Taxpayer.

  • mike

    I did the promo for 5K savings in 2010 points posted in 2011 and I got a 1099 what b.s.

  • Meme

    I really REALLY wish I would have gotten a 1099 so I could not claim the income and then sue TPG for this horrible guidance in suggesting to avoid reporting the income.

  • Anonymous

    Did you even read the post? I never recommended avoiding reporting it- I simply said you could dispute the value with the IRS, which is perfectly legal. If Citi 1099′s everyone for $100,000 would everyone HAVE to pay that, because that’s what is on the piece of paper?

    This blog post is not tax advice- it’s simply summarizing a current situation many people are facing the miles/points world. I apologize if you misunderstood that.

  • geodc

    How can points be regarded as monetary compensation, when they may or may not be used? Would it still be taxable if I am unable to use them? Also, don’t AA miles expire? If not, what happens if AA decides to institute an expiration date? I would think that an inherent element of monetary compensation (and if not convinced, surely one can agree that this is inherent in taxable compensation) is that it does not expire. What are the legal implications of this? Imagine if our salaries came with an expiration date. Central banks can unfortunately devalue currency by inflation, but they don’t go as far as to place conditions on compensation like expiration.

    Commenters like bluto or meme who are angry at TPG for bringing a taxation issue to the readers’ attention should take a step back and cast a skeptical eye on Citi and the IRS. If you want to take a conservative position and pay the IRS or any other authorities any amount that has the remote possibility of being a legitimate tax, then your money is yours to flush away in that manner. But for the rest of us, money is scarce, and as such we cannot afford to default to overpayment without evaluating their legitimacy. It is beyond obvious that TPG is not offering legal advice, but trying to provide information and suggest that the reader investigate the matter before writing more checks to the IRS. Just because a line may strike you as a suggestion doesn’t give cause to condemn critical opinions (and both the IRS and Citi have demonstrated throughout their history that critical opinions are always in order).

    There are some good comments here – particularly those who make the case that points would have to be taxable on redemption to make this work. One person states that the IRS would never go through the process of valuating points. This, I think, is naive. It is more likely that the IRS would force airlines to value their points and report to the IRS. One can only look at the federal debt, the federal deficit, the monetary inflation, and the vast worldwide reach of the IRS to see the pressure the IRS is under to extract more funds out of the economy. The message is that we will all be forced to pay ever-increasing penalties in order to navigate through the den of indignity that air travel has become.

  • Anonymous

    I see the anonymity of blogging has allowed several readers to vent with little thought or rationale… Some have argued that this blog has offered too many credit card offers in the past (which currently isn’t taxable) and should focus on other means of accumulating points. So when checking accounts and brokerage deals are posted… naturally people pile into those offers only to resent the website after they find that their bonus points are taxable. #ironic #firstworldproblems #ungrateful

  • Jackiesyu

    Very informative post and does not deserve any of the negative comments! I read your blog but seldom comment, but I feel the urge to comment today because we are all grown-ups and we all know very well that we, ourselves, are responsible for our own taxes and that’s why we have our signatures on those form!

  • http://profile.yahoo.com/4TO3W6PNP3LMR7LBVUS2Y2RFKA sbjnyc

    Within 10 years I would not be surprised if we’ll have to pay taxes not only for points getting (or redeeming) points, but also for “free” elite upgrades (air and hotel).

  • Pingback: Citibank says frequent flier miles are taxable |

  • Eightyeight

    Hmm, if Citibank considers them as income. Then, we should uniformly consider them to be liquid assets that needed to reported on any profit loss report as liabilities. Therefore, all airlines should list all air miles as debt. The ridiculous part is that airlines can “print” money and inflate its currency. I guess someone wasn’t thinking about the ramifications to pinch some pennies.

  • Eightyeight

    Dang typo.

  • Serion

    Funny you mention that, I called the IRS and the told me to do almost the same exact thing.

  • Emailbrianjohns

    I got a tax form from the AmEx Gift Chain for 700 bucks!

  • Pingback: More Bad News on Taxes and Points: Amex 1099′s Gift Chain Prizes | The Points Guy

  • bluto

    I think you misinterpreted my earlier comment. I am not “angry at TPG for bringing a taxation issue to the readers’ attention”. I actually applaud him for discussing the taxation of miles/points even though that probably hurts his credit card signup income.

    I was criticizing the original post on this topic because it seemed to be very dismissive of the taxability of miles/points bonuses. It’s not a conservative stance to say there’s near unanimous agreement that points and miles are not taxable, and that the IRS will not go after taxpayers. The Citi bank account miles are almost certainly taxable and the IRS has every right to audit you if you do not report it. Maybe the IRS won’t bother with you, but I’m certainly not telling anyone to dismiss the risk.

  • http://www.yourPFpro.com/ YourPFpro

    I would absolutely not pay the IRS one cent if I receive a 1099 from Citi. There are so many reasons why you can argue Citi’s valuation of points, or any valuation of points for that matter is incorrect. I would love the opportunity to challenge the government and more importantly Citi on this point. I did receive 150k miles last year, but it was for opening up a credit card account. That being said, I will still call in to Citi and let them have it as I don’t want them to start treating credit card accounts in this same manner!

  • gryphon

    Got a 1099 for $1K due to redeeming Thank You Points. Citi said any redemption over $600 triggers a 1099. I got $3,000 in gift cards. Will talk to my tax attorney but figure I’m stuck.

  • Pingback: Saturday Recap: British Airways Visa Bonus Ending, 30,000 Bonus American Miles, Aeroplan Bonus Miles and More | The Points Guy

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  • Julz Fabros

    Save time and avoid penalties filing your tax forms.For fillable 1099 forms or any tax form you need you can find it at PDFfiller
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