Are Frequent-Flier Miles Taxable?

Frequent-flier miles definitely provide a financial benefit, but are they taxable? Don’t even bother reading this post if you are hoping to find an answer to this tax problem.  There is no answer here.

Today the LA Times reported that a number of folks were offered frequent-flier miles as an incentive for opening up checking and savings accounts with Citibank last year. What they weren’t told is that Citibank would be reporting the miles to the IRS as income — 2.5 cents per mile, to be precise. Getting a 1099-MISC (miscellaneous income) in the mail was a shocker for these Citibank customers, but tax professionals found it odd as well.

It is not clear where the IRS stands on this issue. The 2012 instructions for Form 1099-MISC, state that income tax must be paid if at least $600 in “prizes and awards” is received. However, a 2002 policy statement suggests otherwise:

[The IRS] has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles. 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 or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.

Citibank is clearly just protecting itself due to the lack of clarity in the law.

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