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

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.

Daily Newsletter

Reward your inbox with the TPG Daily newsletter

Join over 700,000 readers for breaking news, in-depth guides and exclusive deals from TPG’s experts

Email address

Sign up

By signing up, you will receive newsletters and promotional content and agree to our Terms of Use and acknowledge the data practices in our Privacy Policy. You may unsubscribe at any time.

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?
[card card-name='Chase Sapphire Preferred® Card' card-id='22125056' type='javascript' bullet-id='1']