Congress: Please Don’t Close This Tax Loophole!
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Tax reform is back on the agenda in Congress. And folks are wondering how it will affect their lives.
Regardless of your stance on the issue, there is one thing we can all be happy about – miles and points do NOT usually count as income. So you don’t have to pay taxes on the points or miles you earn from purchases.
But there are situations where you might have to pay taxes on certain rewards.
Let’s take a look at why miles and points are generally NOT taxable. And when you need to pay attention to possible tax implications.
We are NOT tax experts. So please don’t use this as legal advice!
The Advantages of Not Paying Taxes
For many folks, taxes are one of life’s biggest expenses. You might not think of them often, because they get taken out of your paycheck before you ever see the money. But depending on where you live and how much money you make, you could be paying between ~20% to ~40% in taxes (federal, state, local, etc.).
So if you want to save $1,000 to spend on travel, and your tax rate is 40%, you would actually have to earn ~$1,667 before taxes (~$1,667 X 60% after tax income = ~$1,000)! But if you earned $1,667 worth of points and miles, you’ll get to use all of it for travel or other perks.
When you don’t have to pay taxes, you get huge savings! This is one of the reasons points and miles are so valuable for ordinary middle-class folks!
Why Aren’t Points & Miles Considered Income?
In general, the IRS taxes money you have coming in. That’s the paycheck from your job, and also interest from bank accounts, business income, and much more.
When you earn points & miles, most of the time, it is the result of a purchase that you made. If you spend $100 and earn 500 points that are worth $5, the IRS usually considers that $5 a rebate or discount – NOT income. With rebates and discounts, it usually doesn’t matter how big they are – you shouldn’t have to pay taxes on them.
When Should You Be Concerned About Taxes on a Reward?
In rare cases, when you earn points or miles from a contest or promotion that didn’t require a purchase to enter, you might owe taxes. This was the case a few years ago when Citi offered ThankYou points for opening new bank accounts.
Citi sent out 1099-MISC forms for the bonus. And one couple decided not to report the income to the IRS. Instead they fought the taxation of their points in court. They lost when the judged ruled the bonus was like interest income, because it resulted from banking activity.
Team members Harlan and Jasmin had a similar situation with cash back earned from referring others to their Discover it® Cash Back cards. They received a 1099 for the referral bonus, and the cash back match. And had to claim the referral bonuses on their taxes!
But in general, you will NOT have to pay taxes on rewards if you don’t get a 1099 tax form. But again, we are NOT tax experts. So you should always consult a professional before making any decisions.
Miles & points are a great way to travel for less. Because they generally are NOT taxed. This is true for rewards you earn for making purchases.
In rare situations, you might have to pay taxes on the points or cash back you earn. This is more common with bank accounts, or if you earn a large amount of cash back by referring others to a card.
In general, if you get a 1099 form for the rewards you earned, then you’ll need to pay taxes on it. But I would suggest talking to a tax professional before you do anything.
Let’s hope miles & points will continue to be tax-free!
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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! :)