Frequent Flyer Miles Now Taxable?
Recipients of frequent flyer miles from Citibank sometime during 2011 may find a surprise in their mail right around now. The Los Angeles Times reports the bank is mailing 2011 Form 1099-MISCs to certain customers who received thousands of miles as rewards pursuant to its ThankYou rewards program.
This news comes as a surprise. It’s the first time I have heard a bank treating frequent flyer miles as income. Citibank is valuing each mile around 2.5 cents. If the total value of the miles received is $600 or greater, then Citibank will issue a Form 1099-MISC.
In IRS Announcement 2002-18, the agency stated it “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.” The IRS hasn’t said much on the issue since then.
Perhaps Citibank views rewards attributable to use of a credit card for non-business purposes as outside the scope of 2002-18. By treating these rewards as income to the customer, Citibank may be entitled to a corresponding deduction. Here’s what Citibank has to say in the ThankYou Rewards terms and conditions:
Redemption of ThankYou Points related to your participation in ThankYou Rewards may result in your receipt of taxable income from Citibank in the tax year in which the ThankYou Points are redeemed. In accordance with U.S. tax law, Citibank may be required to send to you and file with the IRS a Form 1099-MISC (Miscellaneous Income) for the year in which a reward is issued to you. The valuation of ThankYou Point redemptions for Form 1099-MISC tax reporting purposes will be at Citibank’s sole discretion. You are solely responsible for any personal tax liability arising out of the redemption of ThankYou Points. Please consult with your Tax Advisor if you should have any questions regarding your personal tax situation.
I’ll paraphrase: We [Citi] believe the rewards may be taxable, but we’re not sure, so go ask someone else. And since we’re not sure, we’re treating it as income and likely increasing your federal income tax liability. And by the way, we and only we determine how to value something that you may have to pay tax on.
Gee, thank you for offering me ThankYou Rewards!
The amounts reported on 1099-MISCs by Citibank will be in the IRS system. What will the IRS do if a taxpayer does not report such amount on her tax return? Of course, the IRS can make life simple for the potentially millions impacted by issuing a new announcement. But that’s probably too much to ask for, leaving the situation in a state of flux.
(Hat tip: TaxProf Blog)