How the IRS treats frequent flier credit card rewards

By Randy Petersen

Welcome to CreditCards.com's premiere credit card rewards column, "Cashing In." This weekly column features credit card reward program expert Randy Petersen of InsideFlyer magazine and WebFlyer.com. Known as the "miles guru," Petersen is currently the chairman and president of a number of travel related companies. Please use our "Ask the experts" form to ask your rewards program questions. "Cashing In" will run every Thursday on CreditCards.com.

Cashing In

Randy Petersen is editor and publisher of Inside Flyer, which is considered the leading publication in the world about frequent traveler programs. At CreditCards.com, he writes Cashing In, a weekly feature in which he answers readers' questions about credit cards rewards programs. Ask a question.

Dear Cashing In,
I've accumulated quite a bit of rewards in 2008. When cashing them in, are they considered gifts or taxable income? How does the IRS treat rewards? Should I be reporting them as income on my tax return? -- Constance

Dear Constance,
It's not even April 15 and you are going to love this answer -- credit card airlline rewards are not considered anything by the Internal Revenue Service. After years of speculation among frequent fliers, the IRS actually published a ruling in February 2002 known as Announcement 2002-18 which clarified for the first time that "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."

In government talk, that means you and millions of others are guilt-free when it comes to flying for free. The decision by the IRS comes from their frustration at trying to separate personally earned miles, which are considered "rebates" and thus nontaxable, from business-earned miles, which may be a taxable benefit.

While we may complain about frequent flier programs being so complicated, it just may be that we're lucky they are -- at least complicated enough that even the IRS can't figure them out! But, there is more to this story. First of all, if you are a kind and generous frequent flier, you are not eligible for a tax deduction were you to donate an award or miles to a nonprofit organization such as the Ronald McDonald House or the HeroMiles program (this comes up a lot). It seems reasonable that if the miles are not considered a taxable benefit, then you should not be able to declare it as a deduction.

On the flip side, if you were to get frustrated with not being able to use your miles and decide to sell them to someone else on eBay or craigslist, well, the IRS did say in Announcement 20-18 that the tax relief did not apply to travel or other promotional benefits that are converted to cash. This means if you've ever sold your miles, it is considered taxable income. Now, aren't you glad you asked!

See related:  Is it time to cash in your frequent flier miles, Airline frequent flier fees and rules

The Wall Street Journal refers to Randy as "... the most influential frequent flyer in America," while The New York Times tagged him "the world's leading expert on airline frequent flier programs." Randy is editor and publisher of Inside Flyer magazine -- considered the leading publication in the world about frequent traveler programs. He is a regular speaker at business travel seminars and conferences around the world; and is often called upon by the industry itself for his comments and suggestions about the future of frequent traveler programs.

Send your question to Randy.

Published: February 19, 2009

	Three most recent Cashing In stories: Pitfalls of pumping, dumping sign-up bonus cards – The "pump and dump" strategy of taking advantage of huge bonus sign-up reward points or miles can really mess with your credit if you're not smart ... Are your air miles at risk if you fall on hard times? – A reader wonders what would happen to his miles if he closes his credit card account, settles with the card company or goes bankrupt ... Be wise when cashing in rewards points – To reap the most out of credit card rewards programs, it's important to pay attention to which rewards give you more bang for the buck ...

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