Did you know that you could be taxed on your frequent flier miles? That’s what thousands of Citibank customers learned when they received a 1099-MISC from Citi, which reported their miles as income to the IRS. These miles would have to be reported on their tax returns, or they could risk getting a notice from the IRS.
Understandably, some customers who were notified that 30,000 miles was considered $750 of income were furious and shocked that the bonus miles they earned from signing up for a Citibank credit card could be taxable. Some even asked to have miles canceled and were told by Citibank that they should have asked before the end of 2011, even though customers were not aware of this tax liability until they received the form.
Frequent flier miles can be categorized in a six ways, but here is what it boils down to: rebates (not taxable), promotions (taxable), or prizes (taxable). Rebates aren’t taxable because they are seen as a purchase price reduction. However, promotions, such as those bonus miles for signing up for a card, and prizes, such as winning free miles from a sweepstakes, are considered income.
The IRS hasn’t given definitive rulings outlining how frequent flier miles should be treated, but here are some general guidelines from industry experts:
- Miles earned from travel are considered a rebate.
- Miles earned from purchases on a credit card are considered a rebate.
- Miles earned from business travel are not taxable according to a 2002 IRS ruling.
- Miles earned from opening a credit can be considered a taxable promotion. However, some credit card companies consider it a rebate since there are spending requirements or annual fees associated with signing up.
- Miles awarded for deposits to a mutual fund can be considered a promotion. While there is no definitive law, private-letter rulings have been found declaring that these miles are taxable.
- Miles awarded from a sweepstakes are a taxable prize. Some winners have actually rejected their miles so they wouldn’t have to pay the taxes on them.
If you receive a tax form, it is very important to make sure that you take it into account when you are filing taxes, because this income has been reported to the IRS. Failure to do so could lead to tax debt, back taxes with interest, and penalties.
It can be confusing when you receive a surprise tax form. If you want to avoid mistakes while filing your return, or you have already filed and need an amended return, the tax professionals at professionaltaxresolution.com can help with your tax settlement. They have the expertise to help you navigate the intricacies of tax laws and regulations. If you need help with tax resolution, contact us at (877)-889-6527 or email info@protaxres.com to receive a free, no obligation consultation.
