Do You Have to Pay Taxes on Your Frequent Flyer Miles?

Several readers have sent me a Los Angeles Times piece about Citibank’s reporting of mileage signup bonuses for bank (not credit card accounts) beings reported to the IRS on 1099 forms. I’ve written about this sisue several times in the past, and I have a new post up on Conde Nast‘s Daily Traveler.

I make the point that just because something is reported to the IRS doesn’t mean you have to agree that it is taxable or agree with the valuation of the entity sending you that tax form. The IRS has said in the past that not paying taxes on miles wouldn’t generate an enforcement action, and I argue that the value of the miles is likely lower than that being reported by Citi. In the Daily Traveler post, I share how to dispute the valuation and reduce your tax liability, though of course I know better than to offer specific tax advice for individual situations that I don’t know about fully (and I am not a CPA< just someone who doesn't want to pay taxes on his miles!)

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. But given the myriad of opportunities to earn ff miles for credit card signups, isn’t it crazy to mess with bank account bonuses where a 1099 will be generated? Having twice dealt with situations where the IRS insisted I owed taxes that I didn’t really owe due to inaccurate reporting by an investment fund, I wouldn’t wish this experience on anyone.

    In my cases, with my letters and phone calls, I was able to get the fund to issue a revised statement to the IRS. But here, I doubt Citi will do that for you. You’re going to have to argue it’s not income. That seems even harder. Why put yourself through the pain?

  2. What Citi is trying to do is write off the value of miles, deducting it from their corporate income. What the IRS should really do is look at the value Citi is trying to write off, which is likely excessive.

  3. what about your thoughts on citi’s thank you points? i’ve never been able to get a clear answer on if they issue a 1099 for thank you points associated with a checking account.

  4. @ nycman

    Citi will write off the COST of miles as expense. And there’s nothing wrong with that.

    I dont think Citi will use “value of miles” as write off.

  5. @go kings go-

    I have been getting 1,200 – 1,300 TYPs a month for my checking account since the program started and never received a 1099.

  6. I read the IRS statement you linked to and I’ve seen other tax opinions on this. The IRS statement merely indicates they have not pursued tax on miles earned attributable to business travel. This isn’t a blanket no-action letter on all miles earned from any source.

    The key distinction I have seen elsewhere is that when the miles/points are a form of rebate, then it is not considered income. So, for example, miles you receive related to a ticket you purchased is a form of rebate. Likewise, miles earned for using your credit card are a partial rebate on your purchase. However, in a bank account where there is no purchase going on, it’s very likely that miles received could be characterized as a form of interest on capital. I don’t think it matters much if the “miles interest” payment is paid up front or paid out monthly but the latter (a la Bankdirect) looks highly analogous to typical cash interest, and I think you’d have an uphill battle to find competent tax counsel to argue on your behalf that it’s not.

  7. If your return does not match the 1099, the IRS is very likely to send you a letter assessing additional tax. So the safest approach is to report what is on the 1099 on your return, then on a separate line subtract the prize FMV adjustment (the last suggestion in the Conde Nast article). (The IRS is less likely to question this approach, since they automatically match all 1099 entries against your return, but FMV adjustments are spot checked manually.)

  8. I’ve donated expiring miles many times, and haven’t been allowed to write off a cent… at least to my knowledge. If should work both ways, like claiming your winnings and losses as a gambler. If I can’t write off miles donated, I’m not going to fill in a 1099.

  9. “I make the point that just because something is reported to the IRS doesn’t mean you have to agree that it is taxable”

    Maybe, but I think a taxpayer has to agree if the IRS says it is taxable. With the latest IRS clarifications pointed out today by Wandering Aramean, I think it’s worth updating readers on the latest tax position: miles received from opening up financial accounts can be taxable. Up until today the travel blogoverse has been advising the opposite for the most part.

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