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IRS Says Airline Frequent Flier Miles May Be Taxable

February 2, 2012

Citibank recently confused many of its customers by mailing tax forms to those who received free airline frequent flier miles because they opened a bank account.

The bank claimed the miles represented miscellaneous income, whether they were used or not. On the other hand, Citibank contended that the free miles awarded for using its credit cards were not taxable.

This caused considerable confusion among customers, and Sen. Sherrod Brown, D-Ohio, urged the bank not to create “baseless fear” in its customers that they owed a “nonexistent tax burden.”

So far, the Internal Revenue Service has not issued official guidance on the matter, but a persistent Los Angeles Times columnist, David Lazarus, got an answer from IRS media relations.

“When frequent-flier 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 told him.

On the other hand, the IRS confirmed that the miles awarded for using a credit card are not taxable because they’re considered to be more like a rebate.

For the free miles awarded for opening an account, they would be valued according to how much they would be worth to the account holder, not how much the bank paid for them, which was naturally less. “Under the income tax law, the amount of income to the taxpayer is the value of the property received, not the cost that the business paid to acquire the property,” said Eldridge, according to the LA Times.

As for other types of rewards programs handed out by companies beyond free airline miles, and whether that needs to be reported on a 1099, she said that depends on “nature, value and other facts and circumstances surrounding the particular incentive.”

Still, despite the clarification from the good folks in the IRS media relations department, it seems that it would be a good idea for the IRS to issue official guidance on this matter.

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