Citi Settles Class Action Lawsuit Over Value of AA Miles
It's generally established — but unfortunately not formally part of the tax law — that miles and points earned from credit card sign up bonuses aren't taxable. Even if you only had to make one purchase to get 60,000 American Airlines AAdvantage miles, the bonus is seen as a rebate of the purchases made.
This isn't the case for bank account sign-up bonuses. Since you aren't spending any money to earn the bonus, there's no way to call it a rebate. Treated as a substitute for interest, bank sign-up bonuses are taxable. In the case of $500 cash bonuses, the value is easy to determine. For free toasters and clock radios, there's a reasonable way to get a value of what the item is worth.
However, when the bank awards something that's hard to value and which you don't truly own (i.e. airline miles), valuing the bank bonus gets a lot harder. For years, Citi has valued American Airlines AAdvantage miles at 2.5 cents per mile. While it's certainly possible to get this much value out of AA miles, it's not easy to do so regularly. Based on the value you can expect to get out of AAdvantage miles, TPG currently values the AA at 1.4 cents per mile.
Say you signed up for a CitiGold bank account in 2015. In early 2016, Citi likely sent you a Form 1099 reporting $1,250 of income for the 50,000 AAdvantage mile sign-up bonus. A copy of this form also went to the IRS. So, if you didn't report the income, you'd have gotten a nice love note from the IRS, tacking on interest and possibly penalties.
A class action lawsuit was filed in February 2012 on behalf of all of those who received AA miles as a Citi bank account bonus. The lawsuit challenged the valuation of the miles at 2.5 cents each and alleged that Citi didn't properly disclose that it would be filing a 1099 to report income at this elevated rate.
While denying the allegations, Citi has just agreed to settle this lawsuit. Citi will pay "eligible Class Members" up to $1.75 million. Here's how to tell if you're one of these Class Members:
- Must have received a Form 1099 from Citibank as a result of opening a bank account and earning AAdvantage miles
- The 1099 must have valued the miles at 2.5 cents per mile
- Eligible period: January 1, 2009 and July 13, 2017
If you are an eligible Class Member, you can get up to $245. The claim amount is determined by taking 70% of the amount reported on the 1099 and multiplied by your tax rate. For those that received a 1099 reporting $1,250 for 50,000 AA bonus, you'd need a 28% tax rate to get the $245 maximum (50,000 miles x 0.025 valuation x 70% x 28% tax rate). To file a claim, you must do so by November 27, 2017 and here's the link to get started.
If you are an eligible Class Member and want to opt out of the class, you must do so by October 11, 2017.
The author is a Certified Public Accountant (CPA) in Georgia. However, this article has been prepared for informational purposes only, and is not intended to provide — and should not be relied on as — tax advice. Please consult your tax advisor.