Relax! Most Miles & Points Are NOT Taxable

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I am not a tax adviser so you shouldn’t interpret this post as offering tax advice.  Please consult with your tax adviser for advice specific to your situation.

I’ve received lots of email and comments from folks worried about paying taxes on miles & points.  Taxes and Miles and Points are both complex topics (I love both these topics!), so I understand why there has been so much incorrect information circulating.

Top Line: You WON’T have to pay taxes on the miles and points earned from credit card sign up bonuses.  But you do have to pay them on prizes (for example, winning miles in a sweepstake) and on the sign-up bonus for opening checking or savings accounts with Citi.

Before we start, you should know that I have an unpopular view on taxes. Like former Supreme Court Justice Oliver Wendell Holmes, I believe that “taxes are the price we pay for a civilized society.”   Good roads, good governance, and a strong military are just a few of the benefits of paying taxes.

I also believe that everyone should engage in  tax  planning – which is  working within the bounds of the tax law to minimize the amount of tax you pay.  This is very similar to collecting miles and points and learning the airline and hotel loyalty program rules so that you can get the most benefit.  At the other end is tax evasion which is the criminal non-payment of taxes, which is vile and despicable.

So – and I know this will sound strange -  I like paying my taxes so that I can enjoy the collective benefits they provide, but will work hard to pay as little of them as possible.

Newspaper reports on 1099 issued by Citi

There have been lots of reports of Citibank issuing 1099-misc (a form used to report miscellaneous income to the IRS) for miles.  Some reports incorrectly say that Citi has been issuing 1099 for miles earned from credit card bonuses.  This is NOT true, and I don’t know of anyone who has received a 1099 for a credit card sign up bonus.

The tax treatment of miles and points is murky at best and relies on a few private letter rulings (which apply only to those involved in the private ruling with the IRS).  But the sky is not falling!

The Wall Street Journal has the best summary of the treatment of frequent flyer miles and of the 6 different ways you can earn them, only 2 are taxable (the sign-on bonus for opening a checking or savings account, the interest paid in the form of miles, & if you win them in a prize).

Citi checking & savings accounts

Citi HAS issued 1099s for folks who earned miles or points for opening a Citi banking (checking or savings account).  This isn’t surprising, because:

  • They issued 1099s for checking and saving accounts last year as well
  • The terms and conditions of the checking or savings account indicated that you would be taxed on the miles or points earned for opening the account.

I’m not sure why the issue got so much publicity this year, but not last year, but this isn’t new and it isn’t something to get worried over.

Yes, you do have to pay taxes on miles and points earned if you get an incentive (toaster, stuffed toy, or miles) to sign up for a checking or savings account.  The rule/current practice is different for credit card sign up bonuses which will be discussed later. The Wall Street Journal quotes an IRS spokesperson:

“When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law.” This makes the miles akin to toasters or iPods given out as promotional gifts.

Some have interpreted the IRS use of “financial account” to suggest that credit card sign-up bonuses may be next in line.  Now that is possible, but very unlikely in my opinion, as I explain in the next section.

Citi has to issue a 1099-misc for payments above $600.  If it didn’t issue them, it would face substantial penalties.

But why has only Citi issued 1099s and BankDirect (which also offers sign up bonuses and pays interest in miles) not issued 1099s?

Well, that could be because BankDirect values the miles at a much lower rate than Citi which did not trigger the $600 threshold to issue a 1099.  Or because BankDirect didn’t consider the taxability of miles earned from bank account  or pursued a more aggressive interpretation of the law.

Credit card sign up bonuses are NOT taxable

Rebates are NOT taxable.  For example, if you get $1 off at the grocery store because of a coupon, you don’t have to pay taxes on that $1.

Most credit cards require you to hit a minimum spend or to do something before you get the sign up bonus.  In addition you have to pay an annual fee for some credit cards.  Mile and points earned on a credit card are considered a rebate and are not taxable.  As an American Express spokesperson explained:

 A spokeswoman said that in general it does not, and likened such miles to a rebate. “Often there is either a spending requirement to get the miles, or the customer is paying an annual fee to sign up for the card,” she said.

There is a big distinction between a rebate tied to a minimum spending requirement or a 1st purchase (like with credit cards) and to receiving miles and points when you open a bank account.  Law Professor Edward Maule writes:

“On the other hand, if no purchase is involved, such as opening a bank account, there is no transaction to which a rebate can be connected. There is gross income.”

And gross income (the sign up bonus from opening a checking or savings account) is taxable whereas a rebate is not.

That’s why credit card sign-up bonuses or miles and points earned for using a credit cards (considered rebates) are NOT taxed.

Prizes are always taxable

Some folks have received a 1099 for participating in American Express’ Gift Chain where you registered your AMEX card and could earn prizes for shopping at selected retailers.

The Points Guy writes:

It just sort of surprises me that Amex is willing to squander the goodwill it engenders with promotions like this by slamming their valued customers with 1099’s.

But the terms and conditions had a detailed list of every possible prize and the fair market value of those prizes.  And by law, American Express is obligated to send 1099-Misc to folks who won prizes over $600.  So don’t blame them!

They also valued American Express Membership Rewards points at 0.9 cents each (10,000 points were valued at $90), which is lower than what most bloggers value them.

You’re supposed to pay taxes on any prizes you win, even if they are less than $600.  Yes, you’re technically supposed to pay taxes on blog giveaways too. :)

But since many folks don’t issue 1099-Misc for prizes less than $600, some folks don’t pay taxes on them…which could be an issue if you’re audited by the IRS.

But bottom line is that NO ONE should have been surprised that they would get a 1099-Misc from American Express if they won prizes in excess of $600.  Now I know that some prizes like the free Shoprunner memberships (free 2-day shipping at select retailers) could be worth less than the fair market value of $79, but you can always dispute the value.

What’s the fair market value of my miles?

I find it incredibly amusing that folks who argue about their incredible 7, 8, & 9 cent per mile redemption are now arguing that miles and points are worth much less than Citi’s valuation of 2.5 cents per mile! Ha!

Yes, Citi’s valuation is likely too high, but it is reasonable for Citi to have determined 2.5 cents per mile because they are not miles and points experts.  American Airlines sells miles for ~2.75 to 2.95 cents per mile, so I can see why Citi sent out 1099s valuing American Airline miles for 2.5 cents per mile.

Some are mad at Citi & American Express & refuse to do business with them in future.  But they are missing the point and future credit card sign-up bonuses!  Citi  & American Express are obligated by law to send folks 1099-misc for payments  of more than $600 and fulfilled their responsibilities.

I also don’t really buy the argument that miles and points have no value because you don’t own them so they shouldn’t be taxed.  If they have no value, you wouldn’t be reading this blog or going to extreme lengths to collect them!

This is a frivolous argument to me, and likely won’t be looked upon too kindly.

How to dispute fair market value of miles and points

Instead, you can challenge the Fair Market Value in the 1099 (if you’re part of the extremely few folks who did receive them) and pay taxes on the reduced value.

Gary shows you how to do dispute the fair market value of a 1099 in his article in Code Nast Traveler.

For example, you received a 1099 for $625 valuing 25,000 American Airline miles valued at 2.5 cents each.  However, you can sell American Airline miles on Points.com for 0.41 cents per mile and get gift cards or a PayPal credit.

So you can reasonably argue that the Fair Market Value of those 25,000 miles is only $102.5 (25,000 miles X 0.41 cents per mile).

And if you’re in the 25% tax bracket, you’ll end up paying only $26 ($102.5 X 25% tax rate) in taxes.  I’d happily pay $26 for 25,000 American Airline miles!

So there you have it folks – your  1099-Misc for $625 resulted in paying an extra $26 in taxes.  That’s not too bad, is it?

Additional Reading:  Here are some of the best (non fear-mongering) articles on the tax treatment of miles and points.

Bottom Line:  The tax treatment on miles and points hasn’t really changed.  Think carefully before opening a bank account with Citi which has a sign-up bonus, but your credit card sign up bonuses are not going to be taxed.  Of course the IRS could interpret things differently in the future, but there are more lucrative areas for the IRS to focus on which won’t generate as much backlash.

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25 Responses to Relax! Most Miles & Points Are NOT Taxable

  1. good article but I humbly disagree with your statement that cc bonuses are rebates.

    “That’s why credit card sign-up bonuses or miles and points earned for using a credit cards (considered rebates) are NOT taxed.”

    I’m aware that some Amex spokesperson supported that view but I wouldn’t be surprised if the IRS one day takes the opposite view. In practice, everyone views these cc bonuses as signup prizes/toasters, and you even refer to it as a signup bonus. It’s not materially different than a signup bonus on a deposit account. Yes, there are sometimes annual fees (but often waived) and there are sometimes min spend requirements but that doesn’t alter the inherent signup prize nature of the 50k miles you’re getting. Bank accounts also sometimes have fees and they also have minimum deposit amounts but no one is arguing that bonuses there are a rebate of those funds. Another scenario that the IRS could use to illustrate what a paper defense the rebate argument is: often cards only require one purchase before awarding the signup bonus (like the us air mastercard). In those cases, how can 40k miles ($400+) of value be a rebate on a $1 purchase? A rebate is a partial return of funds spent. it’s not logical for a rebate to return more than the amount spent. If this rebate characterization worked then all companies would use this trick to avoid taxes; instead of paying taxable prizes, simply require the recipient to pay $1 and then “rebate” the recipient the prize.

    My view on this taxation seems to be in the minority and I hope I am wrong, and perhaps the IRS will never bother to form a view on cc bonuses but I think people should at least realize that the conservative view is to assume these cc bonuses may one day be viewed as taxable. Most people weighing in right now — miles bloggers who receive incentive income for cc sign ups, flyertalkers who have enjoyed the gravy train of cc mile bonuses, and Amex which has used miles bonuses as a tax efficient promo method — are at least subconsciously influenced in their judgment on this topic. I’m not saying that anyone is being deliberately skewed. but I do think the community should step back and realize that most of the opinions being expressed right now are by folks who really hope it turns out that miles are not taxable. It’s like asking your son to judge if he is really too sick to go to school. I highly suspect when a party like the IRS, with opposite motivations, examines this issue it will not be favorable.

  2. I’ll also add that in all of the credit card offers I’ve seen, never once has the signup bonus once been described as a rebate. I’ve never seen a “50,000 mile rebate on your first purchase” or “$300 rebate of your annual fee”. I do see the mileage earning on regular credit card spending described as a rebate occasionally “1% rebate on purchases” or “2% cash back on spending” and I do believe miles/cash earned are pretty bulletproof as rebates.

    I understand substance is more important than form but nevertheless I bet the IRS would note that these signup bonuses are never referred to as rebates in practice, and that arguments to try to shoehorn it into the rebate description are merely justifications based on hope.

  3. United Airlines runs a sweepstake for passengers who complete a survey ((http://www.ualsurvey.com). One winner is selected each quarter to win 100,000 miles. The Terms and Conditions clearly state that “Taxes, if any, are the responsibility of the individual winners.” (http://www.ualsurvey.com/surveys/Terms_and_Conditions_-_United_Track_Edited_for_Translation_FINAL_en.htm)

    UA sells 100,000 miles for $3762.50 (https://secure.unitedmileageplus.com/BuyMiles/OrderPersonalMiles.jsp). Do sweepstakes winners get a 1099-MISC for that amount, so they owe over $940 in taxes for the prize, in which case the miles cost about $0.009 (i.e., just less than a penny) each?

  4. Great post! What a succinct way to look at things. Just one question: taxes interest you?! ;)

  5. what about brokerage sign-up or transfer bonuses? (e.g., transfer $25,000 to ameritrade and get 20K SPG points)

  6. Great post. You are organized and clear. Thanks for the bottom line up front and also at the end (the essay structure is good for readers!) I REALLY like your posture on taxes too – it’s mine – I like the collective benefits we enjoy in this country so I’m happy to pay my taxes, but within the rules, I will seek to minimize that bill. Thank you so much, Daraius.

  7. I can only imagine who you voted for if you LIKE taxes… Sheesh.

  8. The sky isn’t falling…you are right. Darn stuff still makes me a bit nervous. :-)

  9. Great post! I haven’t received a 1099-MISC for the 20,000 miles I received in 2011 for opening a checking account. I did receive a 1099-INT in 2010 for a 5,000 mile bonus for a savings account. Citi’s current offer of 30,000 bonus miles would put you into the $600+ valuation. The same offer also has a 15,000 bonus which is valued at under $600.

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  11. Great post. As usual some poorly research articles scare everybody into thinking something that is not the case. Thanks for being a voice of reason in this mess.

    Just don’t agree about military, war is not the answer.

  12. Good points Bluto. Getting X miles from signing up for a credit card is no more a “rebate” than getting Y miles for signing up for a bank account and depositing money. On substance neither are rebates. In fact, I got 50K AA and 50K DL miles for signing up for a Fidelity offer and depositing $100K last year. I didn’t get a 1099 for that but I’m sure a good argument could be made for one.

  13. Excellent post, Daraius. Thanks for clearing this up!

  14. thanks for great posting that has been valuable to me as I begin this journey of collecting (and utilizing) miles.

    A small clarification to one of your examples. One actually is taxed on the amount of a coupon used at the grocery as it is considered a form of payment. A store coupon, however, actually reduces the price of the goods and thereby garners no sales tax liability for the coupon amount. Clear as mud?

  15. I’ve had a few family members and friends freaking out this week about the exact same thing. Thankfully none of them did the Citi checking bonus. Just the headache of collecting those miles and the 1099 Misc’s issued is not worth it to me. Maybe that’s partly b/c I’m sitting on a mass amount of AA miles that never seems to get smaller? ;)

  16. Due to some cash flow issues, I used some chase sapphire preferred points to purchase a camera that we use in our rental business. I assume for the same reason that bonus points aren’t taxable that this is not a tax deductible purchase. If the IRS starts taxing points, I would think we would also be able to start deducting them from income when used for business. This could be very complicated and presumably the IRS has bigger fish to fry.

  17. @bluto – Thanks for the extremely thoughtful comment!
    1) It *is* possible that the IRS takes a different view later on, but that is extremely unlikely because of the administrative burden involved. Yes, I refer to it as a sign-up bonus, but as the IRS spokesperson said “Whether or not any incentive provided by a business must be reported to the recipient of a Form 1099 depends on the nature, value and other facts and circumstances surrounding the particular incentive”
    So just because I call it a sign-up bonus doesn’t necessarily mean that it is a sign-up bonus. If I call someone an independent contractor, it doesn’t necessarily make them an independent contractor if the facts and circumstances show that I was treating them as an employee.

    Additionally, the average American carries a balance on a credit card and pays interest, so the sign-up bonus *could* be considered a rebate against the future fees and interest. It would be extremely difficult for banks to determine for whom the sign-up bonus is a rebate and for whom it is not.

    2) You’re right, that we * should* consider the possibility of the IRS taxing sign-up bonuses one day (just as Congress could eliminate the mortgage deduction), but in my opinion, both those scenarios are unlikely. But I’m biased, because there is no way I’m earning millions of miles and points without credit card bonuses!

    3) It doesn’t have to be described as a rebate for it to be a rebate. Instead, the facts and circumstances will determine if it is a rebate or not. Buying 2 pairs of shoes and getting the 3rd pair free is not described as a rebate, but is in reality a rebate.

    4) I’m pretty sure that the banks and financial institutions at least have an opinion letter from their tax counsel or accountant indicating that their current position of considering sign-up bonuses as rebates is “reasonable.”

    5) But you’ve certainly presented a very well reasoned argument for the contrary, and it is wise to acknowledge that it *is* a possibility that the sign-up bonuses may be taxed in the future.

    @HS – I haven’t won 100,000 miles, but I suspect that United will use a value close to what it sells miles in its 1099-misc. But you can always challenge the fair market value and potentially pay less taxes.

    @New Girl in the Air - Thanks! Taxes do interest me and at one point I wanted to be a (nerd alert!) tax attorney.

    @bluecat – I haven’t heard of folks receiving 1099s for them this year.

    @susan & @Jenny - Glad you found it helpful!

    @Steve – We wouldn’t have much of a country if there were no taxes.

    @IPBrian - There is always the potential that the credit card bonuses may be taxable, but not for now.

    @FrequentFlyerPost
    - I’d argue that the $600 value is overstated, and would dispute the fair market value.

    @Zach
    - I wasn’t advocating using the military – just making the point that it is only because of collective tax contributions that we can afford a military.

    @HikerT - An alternative explanation could be that Citi was overly conservative in issuing the 1099s and that they should be treated as rebates when you consider the fees and interest paid for those checking/brokerage accounts. But I suspect that there is truth in both sides of this argument.

    @Donna C- You’re right about the sales tax aspect of the store coupon. I was referring to only the income tax aspect of coupons, not sales tax (but that wasn’t very clear)!

    @Travel and Credit
    - I passed on the bank accounts with Citi for the same reason and because it was a huge headache to actually get the miles in my account when I did it the last time.

    @zzd - Good example of just how complicated this could be. And I do agree that there are far more lucrative avenues for the IRS to go after.

  18. Great minds think alike! haha. Looking forward to meeting sometime in a random airport or something.

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  20. Holmes wrote “taxes are the price we pay for a civilized society” in 1904. Back then, taxes paid to local, state and federal governments totaled 6 percent of gross domestic product. Are we really 5 times as civilized today? Or is government buying something other than civilization with most of the money?

    That observation aside, the tax analysis looks 100% accurate to me. Also accurate is the observation that people like to fool themselves into believing convenient untruths.

  21. @Travel and Credit – Me too!

    @taxhound – I’m not saying that government spending is efficient, but I’m sure we’ll both agree that there are many areas where government spending is excessive and not needed.

  22. I got one of the infamous Citibank 30K bonus AA miles with my statement this month. Is there any reasonable way to avoid the 1099? Since it is a tiered offer, with options at 5K, 15K, and 30K miles, I’m thinking of just shooting for the 15K mile bonus – at the valuation of 2.5 cents per mile that’s only $375 in misc income, below the $600 threshold to issue a 1099.

    However, the offer states I need to make debit card purchases of $125/$375/$750 (depending on the tier) and have direct deposit for 2 months to qualify. At that point, it isn’t just for signing up and sounds just as much like a “rebate” as credit card offers. Is this the same T&C that have triggered 1099s in years past? There is no mention at all of taxes or 1099s in the mail insert.

  23. Edit…
    To clarify…I got a Citi CHECKING account offer for 30K bonus AA miles with my AAdvantage Credit Card statement.

  24. Citibank is dishonest and does not disclose in their offer for American Air credit cards that they will give you a 1099 for the 50,000 bonus miles for $1,250. If they clearly did this up front, no one would sign up. They sneakily send you a 1099 MISC at the end of the year for this inflated amount and it takes multiple phone calls to find out what it is for. No other bank does this with bank issued credit card bonus offers. I think everyone should stop patronizing Citibank and their deceptive credit card offers – they do this because by charging us with income, they get a tax deduction. American should drop them and use Chase, Bank of America or some other bank that is not dishonest.

  25. @Ron – Credit card offers don’t get 1099 MISC, but they do send them out for checking accounts with miles bonuses.

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