Are business card flier miles taxable?
By Cathleen McCarthy
Cathleen McCarthy is a journalist whose articles on travel, commerce and consumer topics have appeared in dozens of publications. She writes "Cashing In," a weekly column about credit card rewards programs, for CreditCards.com
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Dear Cashing In,
frequently use airline miles acquired through the use of my business credit
card for personal travel. I have one credit card in particular that I can
either purchase the tickets using miles, or I can pay for the tickets using the
card, then I am reimbursed for them after the fact (tickets to be used for
personal travel). My question is: Are there any tax implications for which way
I choose to purchase the tickets? -- Brian
You shouldn't have to worry
about tax implications on rewards tickets. You earned those miles as a bonus
for charges made (even though you didn't have to cover the charges).
Standing precedent on this
issue is a statement made by the IRS in 2002, regarding "the taxability of
frequent flier miles or other promotional items that are received as the
result of business travel and used for personal purposes." Based on the
difficulty of trying to decipher business use from personal, and the timing and
valuation of rewards, the IRS said it would not pursue tax enforcement with
respect to promotional benefits such as frequent flier miles.
"Consistent with prior
practice, the IRS will not assert that any taxpayer has understated his federal
tax liability by reason of the receipt or personal use of frequent flier miles
or other in-kind promotional benefits attributable to the taxpayer's business
or official travel," the announcement read. "Any future guidance on the
taxability of these benefits will be applied prospectively."
Of course, when that
statement was issued, banks weren't giving out 40,000-mile sign-up bonuses.
Credit card rewards have become more complicated and bonuses more generous
since then. Yet, the actual value of those miles has fluctuated drastically and generic miles such as those offered by the Venture card are quite different
from airline miles. Generic miles are redeemed according to the price of
airfare -- cost times 100 miles -- which is very different from the way airline
miles are redeemed. The value of generic miles drops sharply with more
expensive flights. Airline miles, on the other hand, devalue when seats become
unavailable. How do you put a standard valuation then on miles rewards?
If recent events are any
indication, we're more likely to run into tax issues with sign-up bonuses,
although that's not an issue yet, and certainly not for a company card. (You
didn't get the sign-up bonuses, your company did.) An incident early this year
left frequent fliers a bit anxious about this. In January, Citi sent IRS 1099 forms (for reporting miscellaneous income)to customers who received bonus miles
with American Airlines as an incentive for opening a savings or checking
account. These 1099s valued the miles at 2.5 cents each. Citi did not send
1099s for miles earned as credit card bonuses, however.
As I mentioned earlier, part
of the reason miles have been left alone so far has to do with the fact that
it's practically impossible to accurately valuate them. Most estimates put the current
value of an airline frequent flier mile at about 1.2 cents, 1.5 at most, given
the average cost of airfare today. Thus, the 2.5 cents Citi came up with for
American AAdvantage miles shook some people up. Will banks not only
flag you to be taxed on something they offered as an incentive, and then unilaterally set a taxable value on them at twice their actual worth?
So far, there have been no
reports of taxing miles rewards connected to credit cards, but if any are
vulnerable, given this precedent, it would be sign-up bonuses, not miles earned
for charges made. In that case, your miles would be safe, because you didn't
earn sign-up bonuses for your company card. Whatever bonuses were negotiated,
they went to your employer.
It's possible that taxation
rules on credit card rewards and frequent flier miles will change, of course, but
the Feds are not likely to go after miles for charges made, or the travel they
bought, any time soon.
See related: Determining value of rewards redemption
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