AAdvantage miles earned through BankDirect accounts will be reported as taxable income
If you can't get enough miles for your adventures through travel rewards credit cards, there's a way that you can put your savings to work to earn American Airlines AAdvantage miles. BankDirect offers three types of mileage-earning accounts: Mileage Checking with Interest Accounts, Mileage MMAs and Mileage CDs.
Each of these accounts offers a different earning structure with the potential to earn thousands of miles each year for saving with the online bank. And, unlike other miles-earning bank accounts, these miles haven't, until now, been reported as taxable interest. Unfortunately for account holders, this no-tax treatment will end on Dec. 31, 2019.
On Dec. 2, BankDirect cardholders received an email saying that the bank will start treating miles earned as taxable starting Jan. 1, 2020.
We truly appreciate your business and thank you for banking with BankDirect. We wish to inform you that under current tax law, we are now required to report to you and the IRS the value of miles you receive from BankDirect. If you receive miles from BankDirect on or after January 1, 2020, we will issue the appropriate Form 1099 to you and the IRS in January 2021.
Since American Airline AAdvantage® miles do not have a defined cash equivalent and the value they represent is subject to various factors specific to each American Airline AAdvantage® member, the amount reported will be based on our good faith estimate of the market value. The estimated market value can be impacted by numerous factors and may materially change prior to the issuance of Form 1099 each year.
The silver lining is that it seems BankDirect will be conservative in its valuation of AAdvantage miles. While BankDirect hasn't disclosed what valuation it will use for taxing miles earned through a mileage-earning account, its sister bank has. Both BankDirect and Bask Bank are AAdvantage mileage-earning divisions of Texas Capital Bank.
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As MilesTalk readers caught in the Bask Bank terms and conditions (caution: PDF link), Bask Bank is disclosing to account holders that "miles are currently valued at 0.42 cents" for tax purposes. That's significantly less than TPG's valuation of 1.4 cents per mile.
While Bask Bank doesn't elaborate on how it gets to this valuation, it's likely basing this on a cash-equivalent redemption instead of what you can get by redeeming American Airlines miles for travel. As it turns out, 0.42 cents is approximately the value that you could get for cashing out miles for a gift card through Points.com:
Some account holders may be wondering if they should still maintain savings with BankDirect after these changes. So, let's crunch some numbers.
| Amount saved in a Mileage Checking with Interest account | $10,000 | $25,000 | $50,000 | $100,000 |
|---|---|---|---|---|
Miles earned (per year) | 12,000 | 30,000 | 60,000 | 75,000 |
Value of miles at TPG valuations | $168 | $420 | $840 | $1,050 |
Account fees (per year) | $144 | $144 | $144 | $144 |
Tax at 20% marginal rate | $10 | $25 | $50 | $63 |
Tax at 30% marginal rate | $15 | $38 | $76 | $95 |
Tax at 40% marginal rate | $20 | $50 | $101 | $126 |
Saving small amounts in BankDirect hasn't made sense for a while due to the account's $12 per month service fees. Based on TPG's valuations, saving $8,500 only earns $143 worth of miles per year — meaning you don't even break even. Now that BankDirect is going to report tax on these miles, you're going to need to save even more to earn enough miles to cover the after-tax and after-fee cost.
BankDirect savings accounts earn 100 miles per month per $1,000 saved up to a balance of $50,000. Above that, the rate is dropped to just 25 miles per month per $1,000. That means there's a sweet spot at saving exactly $50,000. If you do so, you'll earn 60,000 AAdvantage miles per year — which are worth $840 at TPG valuations. After $144 in account fees, you'll now need to factor in $50 (at a 20% tax rate) to $101 (at a 40% tax rate) of taxes. The combination of the two significantly erodes the value you'll end up with after taxes and fees.
Related: Maximizing redemptions with American Airlines AAdvantage
In the past, there's been plenty of controversy around mileage-earning bank accounts. For years, Citi sent tax forms to account holders that earned AAdvantage miles as a bonus for signing up for a CitiGold bank account. The trouble is that Citi valued AAdvantage miles at 2.5 cents each — which was much more than most AAdvantage members would be able to get in value from their AA miles.
Accountholders sued Citi over this rate and alleged that Citi didn’t properly disclose that it would be filing a 1099 to report income for the miles earned. In late 2017, Citi offered to pay up to $1.75 million to settle. BankDirect is surely hoping to avoid the same issues by providing advance notice before they start reporting earned AAdvantage miles as taxable.
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 professional.
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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
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- 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.
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- Annual Fee is $325.
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Rewards Rate
| 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. |
| 3X | Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com. |
| 2X | Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com. |
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You may be eligible for as high as 100,000 Membership Rewards® Points after spending $6,000 in eligible purchases on your new Card in your first 6 months of Membership. Welcome offers vary and you may not be eligible for an offer.As High As 100,000 points. Find Out Your Offer.Annual Fee
$325Recommended Credit
Credit ranges are a variation of FICO® Score 8, one of many types of credit scores lenders may use when considering your credit card application.Excellent to Good
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.