How the IRS treats frequent flier credit card rewards
Welcome to the premiere of CreditCards.com's 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.
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
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
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