Citibank Says Your Miles are Taxable

Citibank Says Your Miles are Taxable

Last month, consumers who have Citibank banking accounts that offer miles started receiving 1099 forms from Citibank classifying frequent flyer miles as miscellaneous and taxable income. The forms valued a frequent flyer mile at 2.5 cents per mile. This was quite unexpected for Citibank customers who were suddenly faced with additional taxable income, like Tom Stansbury and Larry Fechter of Palm Springs, Calif. who each received a 1099 from Citibank for the 25,000 American AAdvantage miles they each received upon opening checking and savings accounts at Citibank. “There must have been many thousands of people who, like us, unwittingly took advantage of this promotion, only to later learn that we would be responsible for the taxes based on an inflated value of the miles,” commented Stansbury. “We were quite shocked when the 1099-MISC forms arrived in the mail, as neither of us had even gotten a 1099 for any miles we had received for opening credit cards, etc. from any bank.”

At the valuation of 2.5 cents per mile, that comes to $625 in taxable income when the bonus offer was 25,000 miles. If a person is in the 28 percent tax bracket, that would mean an additional payment of $180.60 due to the IRS.

David Lazarus of the Los Angeles Times wrote an article about Citibank sending the tax forms, interviewing accountants about Citibank’s move, who pointed out that because Citi is reporting the miles as income to the IRS, customers may be on the hook for paying the taxes. Otherwise, the chances of being audited could go up.

Citibank says it is sending the 1099s based on the Internal Revenue Code that states that a taxpayer must pay income tax if they receive at least $600 in prizes and awards. Stansbury, like others we’ve heard from, finds it interesting that the miles were valued at 2.5 cents per mile–just enough to get beyond the $600. And as Stansbury points out, “Here’s the rub: Citibank, by sending out the 1099-MISC forms, gets to write off the value of those miles, while we have to pay the taxes on those same miles. So this appears to be yet another example of corporations getting the benefit of tax laws while the ‘little guy’ pays the taxes.”

In the past, the IRS has ruled that frequent flyer miles are not taxable. A 2002 IRS policy stated that the agency “will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles.”

As Lazarus points out in his LA Times article, “At the very least, the tax agency needs to clarify what happens when, as in this case, a business declares your miles as income paid to you. What happens if you don’t do likewise?”

A few days after the LA Times article was published, Michelle Eldridge, an IRS spokeswoman, said that the 2002 announcement was focused on the use of business-related frequent flyer miles, and suggested the Citibank miles would be taxable, much like any gift given when opening a financial account whether it be a toaster or frequent flyer miles when the value exceeds $600.

“When frequent flyer miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law,” Eldridge said. She added that taxpayers should contact their tax professional or Citibank with concerns about how to proceed. It should be noted that Citibank is sending the 1099s to bank account customers, not credit card customers.

Miles can be viewed as a rebate and not taxable (like miles earned for flying or spending with a credit card) or a promotion or prize, which are both taxable (like miles earned when opening a credit card account or winning a sweepstakes).

It didn’t take long for politicians to step in on the side of the consumers. Sen. Sherrod Brown, Ohio Democrat, is calling on Citibank to end the practice of treating frequent flyer miles as taxable income. In a letter to Citibank he said, “The last thing Citibank should be doing is creating baseless fear in middle-class families, or placing a nonexistent tax burden on the backs of families who are already struggling to make ends meet.” A spokeswoman for Brown said the senator’s office had contacted the IRS to discuss the issue, and had been told by the IRS that the agency would not be updating its 2002 guidelines on the subject.

Bottom line: This will be an ongoing debate. And even if you accept that your frequent flyer miles earned through opening a bank account are taxable, most would argue that a frequent flyer mile is not worth 2.5 cents per mile. Stansbury put this into perspective this way, “Consider the following factual scenario: I have just gotten a promotional award of 25,000 miles, which Citibank values at $625. But I can get a roundtrip ticket anywhere in the U.S. for about $350 (give or take). So how do they figure those miles are worth $625? It makes no sense whatsoever, except to the extent that by inflating the value of the miles, they avoid paying the taxes on the promotional ‘giveaway’ and shift that tax burden to me.”

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