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Valuing frequent flier miles on your tax return

Summary

The IRS treats reward miles like coupons or rebates, not like income or expenses. That means you won’t be taxed on miles earned, but you also can’t treat an award trip as an expense

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QuestionDear Cashing In,
It’s tax time, and I used my reward miles to fly for an in vitro fertilization procedure (100 percent medically necessary). I will be itemizing this year. How much, if any, am I allowed to value my reward miles? I earned the award miles through normal spending. My employer did not contribute at all. Thank you. — William

AnswerDear William,
You are asking about a very specific case: valuing frequent flier miles used for medical purposes when you itemize deductions. However, yours is a question that has broader relevance than merely medical deductions.

A lot of times, similar questions come up regarding, for instance, donating miles to charity: Are those charitable contributions deductible? Or what about a small-business owner who uses frequent flier miles for a business trip. Can those be valued as a business expense? And if so, how?

Unfortunately for people who are hoping for bigger deductions, the Internal Revenue Service has been consistent in saying that it believes reward miles should be treated like coupons or rebates, not like income or expenses.

It’s like if the Mexican restaurant around the corner offers a “buy nine, get the 10th burrito free” card. If you donated the card to charity after buying nine burritos, you could not claim the donation as a deduction for tax purposes. (OK, I know you probably wouldn’t donate a card for a free burrito to charity, but you get the point.)

Just to be sure, I put your question about airline miles to Alison Flores, principal tax research analyst at H&R Block’s Tax Institute. She told me:

“If you pay for a flight solely with frequent flier miles, you cannot deduct the cost of the flight for any reason, including a medical necessity or a business trip or some other purpose. Essentially, this is because the frequent flier miles are treated as reducing your purchase price, or economic outlay, to zero. Put another way, if the flight would normally cost $500 and you used frequent flier miles to cover the cost, you have paid $0 for the flight.”

You also didn’t pay anything for the miles. They were given to you when you charged expenses on a card or flew on the airline. If you read the fine print of airline frequent flier programs, they typically state that their awards are not worth money. For instance, Southwest Airline’s Rapid Rewards program states that “awards have no cash value.”

Now, if you paid some fees related to the travel — baggage fees, award processing fees or airport security fees, for instance — those could be deducted.

Flores says: “If you paid for some or all of the flight with your own money, you may be able to include in your deductible medical expenses the amount you actually paid.”

Of course, in your case, William, the trip must meet other IRS guidelines to qualify. It has to be primarily for receiving medical care. Flores says in vitro fertilization is covered “if you underwent the procedure because of an underlying medical condition that made it difficult for you to conceive.”

The IRS might say that miles and awards are worth nothing for tax purposes. But in your case, William, I hope it was a worthwhile trip.

See related:Is an award flight taken for business tax-deductible?, Are miles earned on my employer’s credit mine, and are they taxable?

 

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