Getting Taxed On Your Miles? Here’s How to Dispute It

This is the last weekend before tax day. I finished most of my tax return but I haven’t filed it yet. I do it myself with tax software, rather than going to a professional, because anyone who will do taxes for someone like me isn’t someone I would trust to do my taxes. I’d rather use the software, put together by real experts, than have someone not in a position to work on more lucrative accounts than mine working on my account.

Here’s some important tax advice for mileage junkies. While in the U.S. frequent flyer miles are not generally taxed (even though theoretically miles earned through business travel, or business expenses charged to your credit card and reimbursed, could be) there is an exception — prizes you win, or incentives you receive that aren’t rebates.

In 2004 I won a prize of 60,000 Starpoints from Starwood for naming the Sheraton check-in kiosk. They (quite properly) sent me a 1099 form and reported the prize to the IRS.

If you receive an incentive for opening a Citibank checking account you’ll get a 1099 for it. (Interestingly, Bankdirect mileage offers do not trigger a 1099 form.)

Citbank reports as taxable the value of miles earned via bank accounts, but not credit cards (though apparently they once did this too – as a mistake! – since the latter are considered non-taxable rebates).

Aside from being annoying, they’re surprising and disrupt financial plans: folks think they’re getting a tax-free benefit but learn it will cost them real money, the net value of the benefit is lower — miles are often reported at a much higher value than is conventionally considered reasonable, e.g. at 3 cents per mile even though prizes are supposed to be reported at fair market value, and airlines frequently sell miles for much less (and no savvy buyer would willingly buy at that price on a regular basis).

Starwood reported my prize at 1.5 cents per point so I had no dispute there.

From a legal standpoint Citibank is probably correct on tax reporting though I’d certainly be disputing the value of the miles reported as too high. I first posted in 2005 and reposted in 2008 how to handle the dispute of miles or prizes reported on a 1099 form to the IRS.

Obviously, this isn’t specific tax advice for your particular situation, and I am not a tax advisor. However this is my best understanding of how this works…

  • First attempt to negotiate with whomever provided the prize.

  • When unsuccessful asking for an adjustment you’ll need to call the IRS at (800) 829-1040. It’s best to do so early in the morning in my experience, since you’ll have a better chance of getting through. Explain that you received the 1099 and disagree with the amount that was reported on it, and that you’ve tried to resolve the situation but have been unable to. Have the following information available:
    • your name, address, phone number, and social security number
    • payer’s name, address, phone number, employer identification number (if known), and an estimate of the correct amount
    • details of how you arrived at your own valuation figures.

    The IRS will send the complaint form to the payer, who has 10 days to respond (you should receive a copy as well). Hopefully the payer will simply send a corrected 1099.

  • If you don’t receive a satisfactory response by the due date of your return, you have two options.

    • One is to include the amount that you believe to be correct on your return and attach the IRS complaint form and an explanation. The IRS may later send you a notice of the discrepancy, so keep your records in good shape.
    • The other option is just to enter an adjustment as a negative amount. (You can even do that without going through the process of seeking to adjust with 1099, but your case may be more strongly documented if you’ve taken that step.) If you received a Form 1099-MISC that shows $1,000 in box 3 for a prize yon won in a contest, but you know that a local store has the same item available for $750, you argue that the fair market value is $750. You can enter the $250 difference as a negative adjustment under Other Miscellaneous Income. One of the popular tax software packages advises that you enter “PRIZE FMV ADJUSTMENT” for the description and “-250″ for the amount.

  • No matter what course of action you pursue, you’ll want to document your adjustments, such as with ad clippings. If the prize was miles, and the fair market value was listed at a cost per mile greater than what the airline charges, simple printouts of the ‘purchase miles’ web pages should do the trick. Document the best prices miles have been sold at during the year

And if you don’t finish your taxes in time? Just file an extension. Be sure of course to have paid what you’ll ultimately owe, though, or else you’ll owe a penalty. It’s only the filing that can be extended, not – unfortunately – the tax liability.


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 »

More articles by Gary Leff »

Pingbacks

Comments

  1. How far back could I revise a prior year’s return? I recall that citi 1099’d thank you points I earned from credit cards at 3 cpm back when that was the actual redemption rate for buying air tickets with TYP. I dont question the valuation but if I understand your post, I could revise the filing with credit card bonuses and spend rebate subtracted from my income.

  2. Did Citi definitely send out 1099s for the 2013 tax year related to checking account AAdvantage mile bonuses? I’ve been checking the Flyertalk page where this is discussed, and don’t see anyone stating that they received one this year. I did not receive one 2 years ago when I received a bonus of 23,500 miles.

  3. Thanks for publishing this again, Gary. I won the NonStopNYC prize last year from Delta (for 2). The 1099 that they sent us says that the value of the prize was $5000. There is no way on God’s green earth that prize cost that much for them. I have checked sample prices – from airfare, to the cost of a meal at Nobu Malibu, other transportation costs. For the estimated actual costs, I chose the highest number… and then added a little more. So, the reasonable estimate I came up with was closer to $3000 for the two of us. I guess at this point, I try to contact ePrize, Inc. (the sender of the 1099)? And simply dispute the amount? Ask them to tell me how they came up with that figure? Suggestions?

  4. I understand that, due to budget cuts, the IRS has cut back on customer service staffing in the last year. So good luck reaching the IRS by phone!! It’ll probably make reaching BA’s award customer service line look like a piece of cake :-).

  5. Honestly, you rarely want to win a travel contest. I usually don’t enter. Having to pay tax on the “fair value” of the prize often means you get to buy a vacation at an OK but not fantastic price, but one that you don’t get to pick.

    At least winning those SPG points was more worthwhile because of the flexibility. 1.5 cents is plausible value. So if you assume you had to pay 1/3rd in taxes, you got to buy them at .5 cents each. I think everyone would do that. But this is a rare “good” travel contest.

Leave a Reply

Your email address will not be published. Required fields are marked *