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TPG on Fox Business News: The Taxation of Frequent Flyer Miles and Points

by on February 20, 2012 · 27 comments

in Citi, Media Appearances, Taxes

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There’s been a lot of buzz lately on taxing miles and points and I recently got a chance to talk about my position on Fox Business’ The Willis Report. The host, Geri Willis, is a fierce consumer advocate, so I had a feeling we might have a similar stance on this subject.
In case you can’t watch the clip, here are my thoughts summed up:
1) Citi is the only bank actively sending 1099s to customers who have checking and & savings accounts and received American Airlines miles as sign-up bonuses. To date, no company has sent a 1099 for miles/points earned on a credit card bonus (to my knowledge). American Express recently sent out 1099s for their Gift Chain promotion, but that wasn’t for miles/points and it was in very few instances.

2) I think Citi is opening up a can of worms by doing this. The IRS has never pursued the taxation of miles and points and it would be an administrative nightmare to enforce. I’d also imagine this issue would be terribly unpopular, so I  don’t see the government making this a top priority – especially in an election year – and Ohio Senator Sherrod Brown, the chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, went so far as to write Citi an angry open letter telling Citi to stop reporting mileage bonuses as taxable income.

3) Even if you think people should be taxed on points and miles bonuses, the 2.5 cents per mile valuation is out of line, in my opinion. 25,000 American airlines miles on their own can only get you a roundtrip MilesAAver domestic award, however Citi values those miles at $625. Where they got that number is anyone’s guess, because AA sells them on their site at 2.7 cents per mile, though most redemptions are closer to 1 cent a mile.

4) Consumers technically don’t even own airline miles – the airlines do. They can (and do) change the programs frequently and will even expire your miles if you don’t keep them active. I’ve seen some stats on mileage expiration and trust me, there are a lot of people who let miles and points expire.

5) If this becomes a trend, banks should inform consumers up front whether they will be taxed. And by that I don’t mean putting it in the terms and conditions that consumers who take advantage of an offer might be taxed for any prizes or incentives they might receive – I mean that banks should say in no uncertain terms, “by accepting this offer of 25,000 points, you will be liable for taxes equivalent to those on prize income worth $625.” I bet a lot of people wouldn’t have bothered with the Citi AA Checking accounts if they knew they’d get these tax bills. This feels like a bait-and-switch by the bank: offering an incentive to get you in the door, then slapping you with a tax bill for whatever value they deem their prize to have.

6) You should always consult a tax professional for advice. I am not one, but if I had one of these 1099′s I’d either dispute the value or not file it at all. Either way, I’d make sure to have documentation and clear reasons why I didn’t report the income (because I don’t see miles as income). This is a risk if you get audited, so once again – ask a certified tax preparer for advice.

The Lawsuit

Since the time people started receiving these 1099′s at the end of January, the situation has kept escalating, and now there’s even a pending class action lawsuit by consumers against Citi that I read about on AllGov.

Basically, two plaintiffs are suing Citibank for reporting the 40,000-mile AAdvantage bonus they each received for opening new checking accounts. Citi used its same 2.5-cent conversion rate and reported the plaintiffs for $1,000 of income each, which is taxable at 35%. That means consumers who scored this bonus would actually have to pay $350 for opening those accounts! It should be interesting to see how this one plays out in court.

What are your thoughts on the taxation of miles and points?

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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  • Marc

    Waitaminute…. taxable at 35%? What is that all about? Are all box 3 1099′s for miles/prizes taxed that high?

  • Chananya

    Do you think that if they win the lawsuit, citi will have to compensate every customer, or just the 2 two people filing this lawsuit?

  • MJLouise

    35% is the highest marginal income tax rate. The point is not the rate; the point is that they are taxable at any income tax rate at all.

  • MJLouise

    Someone on Flyertalk has reported receiving a 1099 from Citi for redeeming ThankYou points:

    http://www.flyertalk.com/forum/milesbuzz/1186241-consolidated-1099s-miles-cash-rewards-all-banks-31.html post #459

  • Anonymous

    Great job on the show! You did great!

  • markv

    Slightly diff. situation. I have asked 5 diff. tax accountants about paying tax on miles that have been sold for cash and they all said that there is nowhere in the tax code that puts a value on miles, so you wouldn’t have to pay taxes because its a rebate. Any thoughts?

  • Cunjian Chen

    A sad news.

  • Anonymous

    Hi TPG,

    Do you have any updated posts/link which lists the airline miles + their expiration dates?

    I just realized that over the past few years I have gotten so many sign-up bonuses, accounts, miles, and points that it’s very easy to forget that you even have an account in some programs which may expire.

    Thanks!

  • N. Chokshi

    Great job, Brian!

    Most people don’t realize how difficult it is to do those interviews… you’re usually stuck in a hot, tiny room with a huge camera staring at you

  • Anonymous

    Thanks! This one was a little more challenging because I was in a remote studio and the ear piece kept popping out. Luckily I’ve still got good hearing or else it could have been disastrous!

  • Jetstream007

    Hi TPG,

    just my two cents: any fair tax usually goes by the principle that if a certain income/revenue is taxable, the cost involved to earn/create that income is deductible. And the other way around of course.

    So, if you buy a ticket that is somehow/somewhere deductable (say your business pays for it and deducts the cost of the ticket), yes, it seems fair to tax the miles/kickback/incentive (@the same rate you deducted).

    If on the other hand a ticket is not deductible (usually the consumer situation), no it’s not fair to tax.

    That’s the principle.

    Of course valuation of any perk/miles (what value will be the taxbase?) is another story, but that is actually not that hard to do if the IRS really puts in a lot of data. I don’t say you will probably like the outcome, but it’s not unfair imho.

    If you can deduct the cost of tickets and you’re not taxed on value/income you get back, you have created a potential loophole. Also I guess that the airlines or banks/credit card companies already do deduct the costs involved. The only valid reason I can see is that it will be a lot of effort (on part of the IRS) for a relatively small revenue, so it doesn’t (yet) make sense for the IRS to go after it. But that is a practical matter. The more attention in the media this will get, the more likely the IRS feels they have to do something about it…

  • Chrisbaxter22

    “Administrative nightmare”? Hardly a reason for government not to get involved since that’s their forte for heaven’s sake. They exist to create such nightmares. More confusion and inefficiency = more bureaucracy to complicate it all even more and keep all this self-feeding operations to justify itself. The administrative nightmare taxing miles and points would involve has got to be like cat nip for the IRS.

  • http://www.travelandcredit.com/ Travel and Credit

    Get a premium account at http://www.awardwallet.com
    Only have to enter in each accounts information once, and it will keep track for you. You can setup expiration notices, and all sorts of stuff. Really handle and a must for any points collector.

  • http://twitter.com/gustav316 Gustav Schmidt

    Wasn’t there a Revenue Ruling from the IRS that expressly said frequent flyer miles and similar points were not taxable? If I were a gambling man, which I am, I’d bet this is allowing Citi to deduct the points as an expense at a higher value than they otherwise could.

  • CBRN

    $625 tax bill? Uhh. That’s $625 in taxable income. Not a $625 tax bill.

  • Anonymous

    Same thing- just depends on how you interpret tax bill. I interpret a tax bill as the amount that you’d be on the hook to pay at your tax bracket

  • Stan

    Do the Fidelity and the other Brokerage account bonuses also get 1099s?

  • Anonymous

    Not to my knowledge or in my experience

  • http://twitter.com/MoneyandMap Susie Map

    Learned a lot from your blog but do me a favor and don’t ignore your 1099 from Citibank. Certain line items (or lack thereof) on your tax return are more likely to stay under the IRS radar, but a 1099 isn’t one of them. If you disagree with the number, simply dispute and document it. Then look for other areas on your tax return to save money.

  • Cohall

    The fact that you don’t, and never will, own the miles you are given is key to this entire debate. The airlines own your miles, and can take them away at any time, should they choose to. I would argue (and indeed, would follow-up with a lawsuit if necessary) that you cannot report taxable income on property that is not owned or transferred to the consumer. I’m no CPA, but that seems to be a pretty open and shut case for not paying income tax on bonus miles.

  • duhmel

    The people at Citi that decided to do this must have a death wish. They alienate their customers and it isn’t clear that the IRS even supports this position. This is a no win for Citi. It iis inconceivable why they are doing this. There is no upside for the company.

  • Milehighguy

    For the moment, taxable are only miles bonuses that are not tied up to spending thresholds (like the ones that go by “earn 20k miles when you spend $2500 in the first two months’) – these are seen as rebates and non-taxable by definition.

    What the Tax Man is currently after are those bonuses that dont have those thresholds as they are seen as prizes and promotions. Effectively, this is only a small fraction of the market as far as I am aware.

    TPG, have you actually researched programs that differentiate between rebates (with spending thresholds) and prizes (pure effort-free points/bonuses)? I think an analysis like this will help a good deal of people who are now confused whether their 2011 miles are taxable or not.

  • duhmel

    It’snot the taxman that is after these bonuses – it’s all Citi’s idea.

  • Grazinghippo

    Right. It’s an issue of what is “income”. If you receive a bonus opening a new credit card, be it money, mileage or a new toaster, then it’s income. If you receive miles in exchange for making a purchase, then it’s only a rebate and shouldn’t be taxed as income.

    I received a 1099 from Chase when I received $150 for opening a checking account, and I don’t think anyone could make an argument that it was not income. Seems like a small leap to get to miles and other promotions. What if you were paid in miles, then no tax? It’s just unreported income without the 1099, it’s not up to the issuer (Amex, airline, etc.) whether it’s taxable. The 1099 doesn’t change anything.

    The issue is just valuation. The IRS already does this with an allowance for driving (in the are of $.50 per mile) even though everyone’s costs are different.

  • Ryan Weber

    How does one join the class action lawsuit? Is it to late?

  • chmom

    In my case I received at 1099 for $750–for 30K bonus miles. But no GIFT involved–had to earn miles by using Citibank’s Visa debit three times a month for three months. How’s that a gift if there are stipulations attached? And ditto, ridiculous valuation. I redeemed points for a roundtrip ticket and bought a comparable ticket for my daughter–at $279.40-less than half what 1099-valued them for. Oh, and when I called Citibank to protest–they handed me off to American Airlines saying that AMERICAN valued the points and AMERICAN was responsbile for issuing the 1099. SHEESH!

  • KC

    Hi Ryan, do you report your reward travel as business spending? I was taxed for AA miles last year and I just started small this year and will travel in F to Asia in December. I was wondering if I can write off the value of the miles as business spending. Thanks

    KC

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