Do You Have to Pay Tax on Airline Miles?

You’ve been earning rewards for signing up for a credit card or using it to earn airline miles.

Are those miles now considered taxable income?

You would think not, but some Citibank customers received a 1099-MISC for airline miles they were awarded for signing up for an account in 2011.  These customers are understandably upset as there was no clear documentation as to the impact of accepting the extra miles.

The Internal Revenue Service hasn’t been clear on how they treat airline miles, either.

Some reports say taxpayers who fail to include the reported 1099-MISC income will not be pursued by the IRS, but do you really want to chance an audit over 20,000 airline miles?

Are Airline Miles Taxable Income?

Here are three different categories of earning airline miles and whether or not that method is considered taxable income.

Travel Miles Associated with Credit Card Spending

What seems relatively clear is that the miles you earn for using a credit card to purchase items or services are not considered taxable income.

Instead, these miles are considered a rebate on the value of the item you purchased on the credit card.

This also holds true for all other credit card rewards programs: any rewards on cash back cards and point-based credit cards is not considered taxable income.

Frequent Flyer Miles for Taking a Flight

Likewise, the IRS has decided that any frequent flyer miles you earn for actually taking a flight (or any other associated travel booked with that flight; so your rental car and hotel charges) will not be considered taxable income.

The Internal Revenue Service actually made an announcement in 2002 on this titled “Frequent Flyer Miles Attributable to Business or Official Travel, Announcement 2002-18” (pdf).  There are numerous administrative problems with valuing the miles, so the IRS has essentially said don’t worry about it.

Airline Miles Awarded as a Prize or Gift

This is where you can run into potential income tax problems.

The IRS hasn’t made an official announcement and despite a few reporters calling into the agency to ask, no clear answer is given.

The problem is if you are given miles as part of a prize or a gift.  There’s a fine line between earning a reward for using your credit card and being given bonus miles for signing up for a bank account.

That is why some Citibank customers have been receiving 1099-MISC statements.  They signed up for a bank account and as part of the marketing to get new customers to sign up they were given 25,000 to 30,000 airline miles.  Since these miles are considered a gift and not a reward, they are deemed as taxable income.  Any taxable income you have with a company — whether through interest earned, bonuses, or prizes — must be reported if it falls over $600 in a given tax year.

That’s why if you win a TV from a company you receive a 1099 for the value of the TV (assuming it is over $600).

Citibank is arguing the miles given to those customers are worth more than $600, and thus they have to report it.  That’s a big problem for angry customers.

Problems with Valuing Airline Miles as Taxable Income

The main problem with Citibank — and any other bank — considering bonus or gift miles as taxable income is that most customers disagree with the value of the miles.

In the scenario above it has been reported that Citibank is valuing the miles at 2.5 cents per mile.  So a gift reward of 25,000 miles is really a “gift” of $625 (or $750 if you received 30,000 miles).  This puts you above the $600 income reporting threshold, and the 1099-MISC is generated.

You would also have to pay income tax if the company gave you merchandise or a cash reward for signing up for an account, just as long as the value was over $600.

There’s nothing inherently wrong with Citibank trying to value the miles as high as possible.  They’re just trying to claim as much of a deduction on their corporate income taxes as possible.  And that’s where the problem comes in.

When it comes to actually valuing the miles in the real world, 2.5 cents per mile is a high standard.

For most reward systems an airline mile is worth 1 to 2 cents.  You can sometimes cash your miles out in the form of a check or statement credit to the tune of 1 cent per mile.  To get to the 1.5 or 2 cents per mile value you need to be spending the miles in a way that maximizes their reward in the system — namely through direct travel with the airline.

At these lower numbers even the 30,000 mile bonus would just hit a value of $600 if the miles were valued at 2 cents per mile.

Will I Receive a 1099 For My Airline Miles?

At the end of the day whether or not you will need to pay tax on your airline miles is currently determined by how the miles were earned.

Your miles earned for swiping your credit card or taking a flight on an airline should be not result in you needing to pay tax.

However, if you sign up for a new bank account and the reward is valued in miles, you need to know what the miles are valued at to determine if you’ll owe tax or not.  Any gifts received over $600 will be reported to the IRS, and you’ll owe tax on them.

Have you ever received a 1099-MISC for airline miles, or any other gift?