Most frequent flyers treat their airline miles like well-earned cash. And like cash, those miles are now taxable, says Citibank which began sending 1099 tax forms to customers who were awarded American Airline miles for opening checking or savings accounts in 2011.
The Citibank forms value their awards at 2.5 cents per each mile. Even a modest award of 50,000 miles could rack up a few hundreds dollars in additional taxes, depending on one’s tax bracket.
IRS treats frequent-flyer miles as "prizes and awards"
Citibank has cited IRS documents that state that if over $600 in “prizes and awards” are received, taxes are due. The IRS initially would not state if mileage awarded by Citibank falls under this category, but David Lazarus reports in the Los Angeles Times that the IRS now says those mile are taxable - in some cases.
What about miles awarded for taking trips, or using a credit card?
Frequent-flyer miles awarded for credit card use ranks only behind actual flying as a way to accrue miles. Many customers rack up over 100,000 miles each year just by opening credit cards and using them.
These miles, however, along with those awarded for actual flights, are not deemed as taxable income or as "prizes and awards" by the IRS, which considers them more as rebates than income, reports Lazarus.
After the tax dustup, the only frequent-flyer miles counted as taxable income are those awarded for opening a financial account. It's yet unclear whether other U.S. banks are including awarded miles on their 1099 tax forms for 2011.
The Points Guy, a blog that helps flyers maximize travel points, also explains the taxable miles rules and includes an ongoing discussion about tax ramifications.
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Los Angeles Times writer Scott J. Wilson details six online services that help track those (hopefully) ever-accumulating frequent-flyer miles.
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