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Relax! Most Miles & Points Are NOT Taxable

Relax!  Most Miles & Points Are NOT Taxable

Million Mile SecretsRelax!  Most Miles & Points Are NOT TaxableMillion Mile Secrets Team

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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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Editorial Note: We're the Million Mile Secrets team. And we're proud of our content, opinions and analysis, and of our reader's comments. These haven’t been reviewed, approved or endorsed by any of the airlines, hotels, or credit card issuers which we often write about. And that’s just how we like it! :)

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A business that pays someone something in consideration of doing business with has a legitimate business expense. Thus when Citibank wines and dines a client, then Citibank has business expense for the such costs incurred and it is not taxable.

Likewise if they give someone a prize in lieu of interest either the interest paid or the value of the prize is not taxable and can be deducted as expenses from Citibank’s income before taxes.

But what if they claimed they paid a $1000 in prize in lieu of interest but really only paid $30 for it.

They dutifully sent you a 1099Misc for the $1000 so as far as the IRS is concerned the books balance.

What Citibank didn’t pay the IRS you did so the IRS is happy as a pig in manure.

Now the IRS claims you owe them income taxes for the $1000 and not the three $30 value of the “prize” they actually gave you. The IRS says they are indifferent to the matter. They want either you or Citibank to pay them taxes for the difference of $970. Citibank has an army of lawyers who will fight their case to the Supreme Court if necessary and so they are always right, even if it is tax fraud on their part The IRS still gets it money one way or the other .

I’m going to tax court on this. I will no doubt lose since they will no doubt require me

to get Citibank to agree that they have committed fraud in order to get relief from the IRS. Citibank can buy the IRS and the whole federal government cant it….they already have .

Call me Don Quixote.

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.

Author
Million Mile Secrets

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

Edit…

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

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.

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.

Author
Million Mile Secrets

@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.

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