The constant changes airlines are implementing to their frequent flyer programs should not be the only thing to worry about for your miles. Now, you could actually also be on the hook for taxes.
Citibank Sending 1099 Forms
This year, Citibank sent tax forms to new cardholders that enrolled in airline frequent flyer programs and were rewarded with points or miles. The bank claims that the 1099-INT forms were sent because the frequent flyer miles were granted based on a reward or prize and thus should be considered miscellaneous income.
IRS Ruling on Frequent Flyers
The IRS has stated for almost over a decade that frequent flyers would not be subject to taxation. More specifically, the IRS has always treated rewards in the form of miles or points similar to a discount or coupon; not taxable (reference Internal Revenue Bulletin No. 2002-10). However, Citibank is only considering points or miles for signing up for the frequent flyer program as income which hasn’t independently been ruled on before by the IRS. This week, a spokesperson for the IRS stated that when frequent flyer miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law. But, they reaffirmed that accumulating miles or points for travel and not for signing up is still not taxable. As a result, it would appear as though Citibank has it right.
How do you value points and rewards?
Points and miles have different values depending on the frequent flyer program that you are enrolled in and how it will be used. For this specific case, Citibank valued the miles at $0.025 which others may argue is too high. But, the point here is that if you do receive miles or points as a reward for signing up for a new program, it appears you’ll have to do some research to estimate your tax liability.
Have we heard the end of it?
We believe there will be more backlash from consumer advocacy groups and the tax profession highlighting the inconsistency in the tax code as it relates to the action Citibank has taken with regards to rewards. It would appear that now any reward or prize signing up to a program would have to be taxable.
More Tax Questions? Browse Answers or ask tax questions online.
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