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Frequent flier miles sometimes contain hidden tax

Summary

If you accumulate miles that have been purchased, be prepared to occasionally see slight charges to cover an excise tax when companies buy miles from the airlines

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Dear Cashing In,

I recently transferred some American Express points to Delta for an upcoming trip, and they charged me what they said was a tax on frequent flier miles. But other times when I have transferred points, there was no charge. Why are transfers sometimes taxed and sometimes not? — Kathy

Dear Kathy,
Usually when we think of the topic of taxation and frequent flier miles, it’s a question about whether miles or award tickets have a value that should be accounted for on tax forms. (Generally, the answer is no, frequent flier miles are not taxable income.)

Here, though, you’re asking a different question: Are airline miles taxed when they are sold or transferred? It’s an important question, because although the total amount of money we’re talking about is probably small, it is a potential cost of participating in frequent flier programs and can erode at least some of the value of joining those programs.

The answer is that since 1997, the government has imposed an air transportation excise tax on frequent flier miles, currently at 7.5 percent of their sale price. You might think this doesn’t affect you. Most people don’t buy frequent flier miles — they typically earn them by flying, or receive them from using a miles-earning credit card.

However, if you receive miles from any source other than the airline, then some company along the way has paid this tax. The cost of the tax can be passed along to you, either directly or indirectly. Credit card companies, for instance, buy miles from airlines and pay the tax.

Sometimes you’ll see this tax, and sometimes you won’t. If you buy miles directly from an airline — which you usually shouldn’t do, because they are too expensive — you probably will see this 7.5 percent tax added to the cost. Car rental companies also like to pass this cost along when you opt to receive frequent flier miles. They buy the miles from the airlines and give them to you, but they typically recoup the cost of the tax by passing it along to you.

For instance, Hertz says it imposes a “frequent flier surcharge” of up to $1 a day to cover the company’s cost of participating in frequent flier programs and to help cover the federal excise tax.

Kathy, as you noted, American Express also passes along this cost when you transfer Membership Reward points to a U.S. airline, since American Express has had to pay that tax to the airline when it bought the miles that it is giving to you. The company says it charges $0.0006 per point, with a maximum fee of $99, “to offset the federal excise tax we must pay on such conversions.” So a 25,000-point transfer would cost $15.

Other companies that deal in airline miles, though, choose not to pass those costs along directly. They just figure it as a cost of doing business and make the expense up somewhere else. There is no fee associated with transferring Chase Ultimate Rewards points to airlines, for instance. A Chase spokeswoman said: “Chase does cover the excise tax as a courtesy to our customers.”

Knowing that some companies charge a fee to recoup this tax money and some don’t might not seem like a satisfying answer, Kathy. But just know that any time you are moving miles around, you could face a small fee for that privilege.

See related: How to transfer your miles and points into other reward programs, Transferring reward points to airlines often yields great value

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