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发帖数: 113 | 1 Relax! Most Miles & Points Are NOT Taxable
Relax! Most Miles & Points Are NOT Taxable
Posted: 11 Feb 2012 01:00 AM PST
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I am not a tax adviser so you shouldn’t interpret this post as offering tax
advice. Please consult with your tax adviser for advice specific to your
situation.
I’ve received lots of email and comments from folks worried about paying
taxes on miles & points. Taxes and Miles and Points are both complex topics
(I love both these topics!), so I understand why there has been so much
incorrect information circulating.
Top Line: You WON’T have to pay taxes on the miles and points earned from
credit card sign up bonuses. But you do have to pay them on prizes (for
example, winning miles in a sweepstake) and on the sign-up bonus for opening
checking or savings accounts with Citi.
Before we start, you should know that I have an unpopular view on taxes.
Like former Supreme Court Justice Oliver Wendell Holmes, I believe that “
taxes are the price we pay for a civilized society.” Good roads, good
governance, and a strong military are just a few of the benefits of paying
taxes.
I also believe that everyone should engage in tax planning – which is
working within the bounds of the tax law to minimize the amount of tax you
pay. This is very similar to collecting miles and points and learning the
airline and hotel loyalty program rules so that you can get the most benefit
. At the other end is tax evasion which is the criminal non-payment of
taxes, which is vile and despicable.
So – and I know this will sound strange - I like paying my taxes so that I
can enjoy the collective benefits they provide, but will work hard to pay
as little of them as possible.
Newspaper reports on 1099 issued by Citi
There have been lots of reports of Citibank issuing 1099-misc (a form used
to report miscellaneous income to the IRS) for miles. Some reports
incorrectly say that Citi has been issuing 1099 for miles earned from credit
card bonuses. This is NOT true, and I don’t know of anyone who has
received a 1099 for a credit card sign up bonus.
The tax treatment of miles and points is murky at best and relies on a few
private letter rulings (which apply only to those involved in the private
ruling with the IRS). But the sky is not falling!
The Wall Street Journal has the best summary of the treatment of frequent
flyer miles and of the 6 different ways you can earn them, only 2 are
taxable (the sign-on bonus for opening a checking or savings account, the
interest paid in the form of miles, & if you win them in a prize).
Citi checking & savings accounts
Citi HAS issued 1099s for folks who earned miles or points for opening a
Citi banking (checking or savings account). This isn’t surprising, because:
They issued 1099s for checking and saving accounts last year as well
The terms and conditions of the checking or savings account indicated that
you would be taxed on the miles or points earned for opening the account.
I’m not sure why the issue got so much publicity this year, but not last
year, but this isn’t new and it isn’t something to get worried over.
Yes, you do have to pay taxes on miles and points earned if you get an
incentive (toaster, stuffed toy, or miles) to sign up for a checking or
savings account. The rule/current practice is different for credit card
sign up bonuses which will be discussed later. The Wall Street Journal
quotes an IRS spokesperson:
“When frequent-flier miles are provided as a premium for opening a
financial account, it can be a taxable situation subject to reporting under
current law.” This makes the miles akin to toasters or iPods given out as
promotional gifts.
Some have interpreted the IRS use of “financial account” to suggest that
credit card sign-up bonuses may be next in line. Now that is possible, but
very unlikely in my opinion, as I explain in the next section.
Citi has to issue a 1099-misc for payments above $600. If it didn’t issue
them, it would face substantial penalties.
But why has only Citi issued 1099s and BankDirect (which also offers sign up
bonuses and pays interest in miles) not issued 1099s?
Well, that could be because BankDirect values the miles at a much lower rate
than Citi which did not trigger the $600 threshold to issue a 1099. Or
because BankDirect didn’t consider the taxability of miles earned from bank
account or pursued a more aggressive interpretation of the law.
Credit card sign up bonuses are NOT taxable
Rebates are NOT taxable. For example, if you get $1 off at the grocery
store because of a coupon, you don’t have to pay taxes on that $1.
Most credit cards require you to hit a minimum spend or to do something
before you get the sign up bonus. In addition you have to pay an annual fee
for some credit cards. Mile and points earned on a credit card are
considered a rebate and are not taxable. As an American Express
spokesperson explained:
A spokeswoman said that in general it does not, and likened such miles to a
rebate. “Often there is either a spending requirement to get the miles, or
the customer is paying an annual fee to sign up for the card,” she said.
There is a big distinction between a rebate tied to a minimum spending
requirement or a 1st purchase (like with credit cards) and to receiving
miles and points when you open a bank account. Law Professor Edward Maule
writes:
“On the other hand, if no purchase is involved, such as opening a bank
account, there is no transaction to which a rebate can be connected. There
is gross income.”
And gross income (the sign up bonus from opening a checking or savings
account) is taxable whereas a rebate is not.
That’s why credit card sign-up bonuses or miles and points earned for using
a credit cards (considered rebates) are NOT taxed.
Prizes are always taxable
Some folks have received a 1099 for participating in American Express’ Gift
Chain where you registered your AMEX card and could earn prizes for
shopping at selected retailers.
The Points Guy writes:
It just sort of surprises me that Amex is willing to squander the goodwill
it engenders with promotions like this by slamming their valued customers
with 1099’s.
But the terms and conditions had a detailed list of every possible prize and
the fair market value of those prizes. And by law, American Express is
obligated to send 1099-Misc to folks who won prizes over $600. So don’t
blame them!
They also valued American Express Membership Rewards points at 0.9 cents
each (10,000 points were valued at $90), which is lower than what most
bloggers value them.
You’re supposed to pay taxes on any prizes you win, even if they are less
than $600. Yes, you’re technically supposed to pay taxes on blog giveaways
too.
But since many folks don’t issue 1099-Misc for prizes less than $600, some
folks don’t pay taxes on them…which could be an issue if you’re audited
by the IRS.
But bottom line is that NO ONE should have been surprised that they would
get a 1099-Misc from American Express if they won prizes in excess of $600.
Now I know that some prizes like the free Shoprunner memberships (free 2-
day shipping at select retailers) could be worth less than the fair market
value of $79, but you can always dispute the value.
What’s the fair market value of my miles?
I find it incredibly amusing that folks who argue about their incredible 7,
8, & 9 cent per mile redemption are now arguing that miles and points are
worth much less than Citi’s valuation of 2.5 cents per mile! Ha!
Yes, Citi’s valuation is likely too high, but it is reasonable for Citi to
have determined 2.5 cents per mile because they are not miles and points
experts. American Airlines sells miles for ~2.75 to 2.95 cents per mile, so
I can see why Citi sent out 1099s valuing American Airline miles for 2.5
cents per mile.
Some are mad at Citi & American Express & refuse to do business with them in
future. But they are missing the point and future credit card sign-up
bonuses! Citi & American Express are obligated by law to send folks 1099-
misc for payments of more than $600 and fulfilled their responsibilities.
I also don’t really buy the argument that miles and points have no value
because you don’t own them so they shouldn’t be taxed. If they have no
value, you wouldn’t be reading this blog or going to extreme lengths to
collect them!
This is a frivolous argument to me, and likely won’t be looked upon too
kindly.
How to dispute fair market value of miles and points
Instead, you can challenge the Fair Market Value in the 1099 (if you’re
part of the extremely few folks who did receive them) and pay taxes on the
reduced value.
Gary shows you how to do dispute the fair market value of a 1099 in his
article in Code Nast Traveler.
For example, you received a 1099 for $625 valuing 25,000 American Airline
miles valued at 2.5 cents each. However, you can sell American Airline
miles on Points.com for 0.41 cents per mile and get gift cards or a PayPal
credit.
So you can reasonably argue that the Fair Market Value of those 25,000 miles
is only $102.5 (25,000 miles X 0.41 cents per mile).
And if you’re in the 25% tax bracket, you’ll end up paying only $26 ($102.
5 X 25% tax rate) in taxes. I’d happily pay $26 for 25,000 American
Airline miles!
So there you have it folks – your 1099-Misc for $625 resulted in paying an
extra $26 in taxes. That’s not too bad, is it? |
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