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.
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?
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| 4X | Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 4X | Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year. |
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Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits. (Partner offer)Pros
- 4 points per dollar spent on dining at restaurants worldwide and U.S. supermarkets (on the first $50,000 in purchases per calendar year; then 1 point per dollar spent thereafter and $25,000 in purchases per calendar year; then 1 point per dollar spent thereafter, respectively)
- 3 points per dollar spent on flights booked directly with the airline or with amextravel.com
- Packed with credits foodies will enjoy
- Solid welcome bonus
Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.