Are your frequent flier miles taxable? This is the question that stumped many consumers who received 1099 tax forms from Citibank. The bank sent the forms to customers who opened a checking or savings account last year and received American Airline miles.
The bank asserts the airline miles can be taxed.
Is that right? Or, is Citibank crossing a line? Unfortunately for consumers it's likely the former.
David Lazarus, columnist for the Los Angeles Times, delved a little deeper into the issue. He asked the IRS for a response. And he got one.
Frequent flier miles can be taxable if it's a reward or incentive to open an account, IRS spokeswoman Michelle Eldridge said.
But this situation is entirely different than one where you "earn" miles by taking trips or using your credit card. The reason is that when you receive airline miles for doing nothing more than opening an account, it's more of a "gift."
When you receive miles because of your spending or air travel it's more of a "rebate," as the Times reports.
"Gifts" are taxable under current laws. For example, if the bank gave you a cash gift for opening an account that could likely be taxed.
Items that are considered a rebate usually aren't considered taxable. It's similar to getting a rebate for purchasing a product. You don't report this as income.
So should you be concerned? Will you really need to open up your checkbook to pay taxes on your hard-earned miles?
Well, if you got a 1099 form in the mail from Citibank you should. The bank has reported the frequent flier miles as taxable income to the IRS, according to the AP. So the government is already on notice. In this specific instance your airline miles may be taxed.
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