Income Taxes On Frequent Flyer Miles?!

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Akio Kon / Bloomberg via Getty Images

We’ve written before about how taxes and fees can turn a “free” flight into one that costs several hundred dollars, but there’s another way your frequent flier miles could cost you: You might have to pay federal income taxes on them. Citi customers who already had the bank’s affiliated American Airlines credit card were solicited by promotions to open a deposit account with the bank and get a cache of bonus miles (the amounts varied by promotion but were generally in the 25,000 to 30,000 range). Now, the Los Angeles Times reports that these customers are receiving 1099 tax forms — essentially turning what customers probably assumed was a free perk into several hundred dollars of taxable income. One customer, the Times said, was shocked to get a 1099 for $645.

The paper reports that Citi valued miles at “about 2.5 cents” per mile; Citi couldn’t immediately verify this, but if this is the case, that’s very high. When cashed in for a flight, miles tend to be worth between one and two cents a mile. It can cost a customer more than two cents each to buy miles if they’re trying to hit a certain threshold, but they’re not worth that much to redeem.

(MORE: Why the American Airlines Bankruptcy Won’t Affect Your Holiday Travel)

A tax expert we asked says most frequent flier miles earned by credit card customers aren’t taxable. “Points, frequent flyer miles, cash back and other ‘in-kind promotional benefits’ are treated as rebates and are not taxable,” Amy Miller, director of The Tax Institute at H&R Block, says via email.

But according to Citi, there’s an exception: Miles customers get for opening an account are classified as a gift, according to Citi’s official statement, which says, “When a customer receives a gift for opening a bank account – whether cash, a toaster or airline miles – the value of that gift is generally treated as income and subject to reporting.”

(MORE: Et tu, Citi? Bank Raises Balance Requirements and Fees)

We asked the IRS and, indeed, Citi appears to be right. “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,” IRS spokeswoman Michelle Eldridge says via email.

What’s not clear is to what degree Citi customers knew they’d be getting a visit from the taxman. Citi provided TIME Moneyland with copies of some of the solicitations that went out — one from January of this year and another from May 2011 warn that the miles could be taxed. But those disclosures don’t spell out the high per-mile price, so customers wouldn’t be able to do some quick math and figure out that a 30,000-mile “bonus” is actually $750 in taxable income.

A promotion from February 2011 is even vaguer; there’s no mention of 1099s, and the only reference to taxes is the sentence, “Customer is responsible for taxes, if any.”

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