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COMMENTARY| In late January 2012, Citibank customers who had responded to a 2011 promotion to receive 25,000 American Airlines frequent flier miles for opening a checking or savings account got a surprise in the mail. An IRS Form 1099-MISC showed a taxable income of $645 from Citibank. For customers in the 25% or 35% federal tax bracket, this means $161.25 or $225.75 in additional taxes. The fine print on Citi's "Thank You" website states "Citibank may be required to send to you and file with the IRS a Form 1099-MISC.... The valuation of ThankYou Point redemptions... will be at Citibank's sole discretion. You are solely responsible for any personal tax liability...." However, the amount of the income upset almost every customer, including me.
What does the IRS say about taxing frequent-flier miles?
According to Michelle Eldridge, an IRS spokeswoman, "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." Under the income tax law, "the amount of income to the taxpayer is the value of the property received, not the cost that the business paid to acquire the property."
How is this different from miles earned on credit cards?
According to the IRS spokeswoman, miles earned for purchases on credit cards wouldn't be taxable because they're more like a rebate off the purchase price. Citibank also said, "Rewards and airline miles provided in connection with a purchase on a credit card are routinely not subject to individual income-tax reporting."
How much are the miles worth?
Most customers equate one mile with one cent, meaning 25,000 miles are worth $250. $625 means Citibank has put a value of 2.5 cents for each mile, the same rate it costs for customers to buy miles from its Thank You site. However, IRS said in 2002 that there are "numerous technical and administrative issues" relating to miles, such as "how they're valued and used."
Will the IRS go after those who don't report these miles?
In 2002, IRS stated it "has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles." It now says, "consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent-flier miles...." However, when taxpayers' 1099-MISC income has been reported to the IRS, if a taxpayer omits the income, it will most likely generate a letter from the IRS stating he owes taxes.
Why did Citi issue 1099-MISC forms?
Catherine Pulley, a Citi spokeswoman, cited the 2012 instructions for Form 1099-MISC, which state that income tax must be paid if at least $600 in "prizes and awards" is received, and the Thank You fine print.
Why am I upset at Citibank?
I am not upset Citibank sent a 1099 this year. In fact, in the past, I have received 1099-INT interest income for opening bank accounts. However, $150-200 bonus for opening the account was in cash. Cash is different from miles. It does not expire, and its value is constant. When I participated in a 20,000 Citi Thank You points promotion several years ago, I did not receive a 1099 since the value was approximately $200, lower than the $600 threshold for generating the 1099-MISC.
However, customers who participated in 2011's promotion were shortchanged because Citi inflated the value of its miles based on its "sole discretion." If customers get an airline ticket out of it, they get next to nothing since they owe that much in taxes. And that is the best case scenario. If the miles expire, customers are out of pocket $161-$226. What is worse is that customers cannot decline the miles, Citibank said requests had to be made before 2011 year-end. In my opinion, the only option then is to donate the miles at the same inflated rate, and then take a charitable deduction a year later, for 2012. I won't be surprised if Citibank now hears "No Thank You. I will be opening my account elsewhere" from thousands of customers.