Customers Receive Tax Forms for Airline Miles Rewards

January 27, 2012

Are airline frequent flyer miles taxable? By the strictest definition, they are compensation: instead of airlines paying customers with cash, they give them miles. Since such a cash award would be taxable, it’s unusual that the miles wouldn’t be. However, this is one of those things that hasn’t been treated by the IRS as taxable, so suddenly changing policy would upset quite a few flyers who earn miles (including yours truly).

Thus, in 2002, the IRS issued a circular reserving their future authority to go after airline miles but indicating that they would not for now, due to “numerous technical and administrative issues relating to these benefits on which no official guidance has been provided, including issues relating to the timing and valuation of income inclusions and the basis for identifying personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures.” So, for now, the miles aren’t taxable income.

Hence the surprise by some Citibank customers who signed up for an account and received 25,000 miles as a reward to get a 1099 statement from the bank, letting them know that they were reporting the miles as income, on their behalf, to the IRS:

Larry Fechter, 66, of Palm Springs was among numerous Citi customers who received a Form 1099 in recent days. He opened a checking and a savings account with the bank last summer after being promised 25,000 American Airlines miles.

“The mileage was a very strong inducement,” Fechter told me.

He said there was nothing in the original sales pitch that warned of the tax consequences of accepting the miles. As such, Fechter said it was a big surprise to get the form in the mail informing him that he has to pay taxes on $645 worth of miles.

Citibank points to the IRS’s instructions that “prizes and awards” are taxable income that must be reported by the bank, and although the IRS has given no official word, the Los Angeles Times concludes that the IRS still stands by its 2002 pronouncement. A clarification may be in order.

Update: The IRS has issued a statement: “When frequent flyer miles are provided as a premium for opening a financial account, it can be a taxable situation to reporting under current law.”

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