Credit card rewards are very valuable, but does that mean you have to pay taxes on them? If you did, how would each mile or point be valued? These are the questions that some people have every year when it comes time to submit their income to the IRS. Interest is also peaked by stories like this one in the Los Angeles Times that reveal that Citibank has been sending out 1099-INT forms to some of its savings and checking account customers who received American Airlines miles. In response, many people are concerned that their credit card rewards in the form of cash back, miles, and points may be taxable.
The IRS has always considered cash back rewards from a credit card to be a discount on the purchase price of goods and services. They view these rewards much like a coupon where the original price is marked down, and a lower price is paid. In all of those instances, the value of the discount is not reported as taxable income.
Frequent Flier Miles and Loyalty Points
If cash back is considered a discount on a purchase price, how are points and miles treated by the IRS? Fortunately, there has been a ruling that the government will not consider points and miles earned to be income. In Announcement 2002-18, published in Internal Revenue Bulletin No. 2002-10 on March 11, 2002, the agency indicated that frequent fliers would not be liable for the miles they earned through credit card rewards programs. The IRS found that it “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.” There is no reason to believe that the same ruling would apply any differently to hotel points or any other loyalty program.
What Citi 1099′s Reveal about Credit Card Reward Taxes
This month, Citi sent out 1099-INT forms to holders of its checking and savings accounts who received more than 25,000 American Airlines miles as a bonus. In these forms, they valued the miles at 2.5 cents each, which is excessive in the minds of many travel experts. Thankfully, there have not been any reports of Citi or any other bank issuing 1099s to credit card holders who earn miles or points.
As neither an attorney nor an accountant, I cannot give tax advice. But based on published reports, there seems to be a consensus that rewards earned through credit card spending do not constitute taxable income.
More importantly, sign-up bonuses such as the 25,000 American Airlines AAdvantage mile bonuses given to checking customers appear to differ from the same sign up bonuses granted to credit card users. With checking accounts, the AAdvantage miles were a gift, not a rebate. With most credit card sign up bonuses, miles, points and cash back are granted after certain conditions are met, such as spending $500 within three months.
Thus, while many heavy rewards earners might be nervous come tax time next year, it seems unlikely that anything but free, unconditional sign up gifts will be treated as income unless the IRS reverses its nearly decade long stance on credit card rewards.
Nevertheless, given recent events, it may be wise to allocate some extra money for taxes in the event 2012 becomes the year credit card rewards lose their tax free luster.