Citi Says Those Free Rewards Miles You Received Are Taxable

If you received a bunch of miles from Citi for signing up for one of the bank’s credit cards or rewards-earning accounts, be on the lookout for a 1099-Misc tax form coming in the mail, as Citi has decided that these miles have a taxable value.

Citi has put a value of around $.025 on each mile, meaning that if you signed up for some program that rewarded you with 25,000 bonus miles, the bank says you owe taxes on $625 of miscellaneous income and it’s telling the IRS about it.

“I’ve been practicing for 25 years and I’ve never had an instance where miles have been treated as taxable,” one CPA tells the L.A. Times’ David Lazarus about Citi’s decision to send out the 1099 forms.

While a Citi rep tells the Times that the bank believes these miles fall under the section of the Internal Revenue Code that “recognizes rewards as taxable income,” a 2002 IRS policy brief states that “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.”

And when Lazarus contacted the IRS for clarification, he was told that the policy brief “still stands.” But while the brief makes it clear — or at least as clear as IRS legalese can get — that the agency won’t go after people for undeclared frequent flier miles, it doesn’t say what will happen if people who receive these 1099 forms from Citi don’t include that amount on their tax returns.

Citibank deems frequent-flier miles taxable, but does the IRS? [LA Times]

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  1. dwtomek says:

    While Citi will question whether they should share the tax burden with the common folk, and they have no qualms with making sure their customers account for every single penny.

  2. dwtomek says:

    While Citi will question whether they should share the tax burden with the common folk, and they have no qualms with making sure their customers account for every single penny.

  3. AustinTXProgrammer says:

    When I got an account opening bonus (cash) from Chase the fine print said it would be reported as interest. The credit card rewards aren’t. Is the OP getting these from a checking account promotion or as a credit card rebate (bonus)? I think that makes a difference as the rebates aren’t taxable but anything that could be interest would be.

    • AustinTXProgrammer says:

      I wanted to note the credit card rewards are cash as well.

    • lain1k says:

      The LA Times article says “The bank is sending tax forms to customers who received thousands of airline miles as a reward for opening a checking or savings account”

    • FrankEliason says:

      This was a bank account promotion. BTW I work at Citi!

      Frank Eliason

  4. Cat says:

    Citi keeps sending me invitations for its credit cards. And I will continue to shred them.

  5. [redacted] says:

    Don’t these types of things usually say something like “cash value is .000009 cents like coupons?

    • [redacted] says:

      I guess its .025 for them but I thought my miles cash value had at least 5 or 6 zero’s in it.

    • Bsamm09 says:

      Doesn’t matter. If you get 1000 miles and 1000 miles are needed to purchase a $500, those miles are worth $500.

      • Cor Aquilonis says:

        But they’re nontransferable! If you use mark-to-market accounting, and there’s no market, then the value is zero. No tax!

        Corporations: I’ve been paying attention to your financial shenanigans, and I’ve learned from you.

  6. Duffin (Ain't This Kitty Cute?) says:

    No way I would ever go with a Citi card now. Good job, guys! You lost at least one potential customer with this BS!

  7. SamiJ says:

    Do the mile have value if they are unused? Shouldn’t Citi only care about redeemed miles?

    • kimmie says:

      I was wondering this too. Because I don’t travel enough, my miles expire when I’m not diligent about them.

    • GriffonJames says:

      On the Citi card I used to have, the miles went into my American Airlines frequent flier account (i.e., they were not generic miles that could be used on other airlines). In essence, Citi purchased those miles on my behalf, I think at a rate of one “mile” for every dollar I charged. Kind of a one-way transaction, and Citi would have no insight into when I exchanged the miles for airline services, nor any way to differentiate the miles in my account that came from Citi versus those that originated from the airline or from other bonus programs.
      At that time, one could sell the miles to a broker for about $0.017 each. So, effectively, Citibank gave me a 1.7% kickback for every dollar I charged. I decided the 2-5% cashback I can get from Discover made more sense.

  8. Nyxalinth says:

    I suspect it’s a tactic to discourage people from using the miles.

    • YouDidWhatNow? says:

      Ummm…what? How would that possibly happen? If anything it will make people even more intent on using them…since they actually cost them money. People may let free miles expire…but miles they had to pay (taxes) for they’re not going to let slip away.

      If anything, this seems like a plot to drive customers away.

  9. scottydog says:

    I would say the miles have no value until actually used and then that value should be based on whatever they are used for. 25k miles may get me a ticket worth $625, but it will also get me a ticket worth $100.

    • longfeltwant says:

      Good try, but no. If you are given something with value, that is income. The government doesn’t wait for you to spend your paycheck before taking your income tax; the government doesn’t allow you to be given a bag full of diamonds without paying tax on it; if you win a car on a quiz show, you pay taxes even if you never drive it or sell it.

      1. you received income
      2. this country has an income tax
      3. you owe the tax

      It’s pretty simple.

      • Bsamm09 says:

        You can be given a bagful of diamonds and not pay a dime in taxes when you receive it. If it increases in value and you sell it you will have capital gains tax though.

        • NeverLetMeDown says:

          Um, no. If it’s a true gift, and falls under the gift tax exemption, then yes, it’s not taxed. If your employer pays you in diamonds, then it’s immediately taxable at the fair market value of those diamonds.

      • scottydog says:

        Just saying it would be nice if it worked this way, but obviously that is not the case. However, in the case of your response, I know what the value of my income is where as the value of miles is variable. Additionally, I am further taxed on my income based on how much I spend.

      • huadpe says:

        But you didn’t receive the income. You received debt. It’s not something of value, but rather the promise of something of value to come sometime in the future (maybe). When you redeem the miles, and only then, do you receive the income.

  10. Kate says:

    This would mean that all discount coupons would be taxable – which is insane, a discount is not a product with value. They are hypothesizing their miles are a form of money, which is essentially illegal.

  11. kosmo @ The Soap Boxers says:

    “But while the brief makes it clear ‚Äî or at least as clear as IRS legalese can get ‚Äî that the agency won’t go after people for undeclared frequent flier miles,”

    Actually, it doesn’t say that. The policy states this in regard to miles “attributable to the taxpayer’s business or official travel”

    If the miles are attibutable to personal travel (i.e. not “business” or “official”) or some other action (signing up for a credit card) the 2002 brief would not be applicable.

    • jessjj347 says:

      ‘Tis also how I interpreted the IRS statement.

    • AustinTXProgrammer says:

      The reason for the memo is that people are collecting rebates on their employers spending. It wouldn’t be a big stretch to call that income from the employer.

      The precedent that the rebates weren’t taxable was already there.

      Again, this is rebates on SPENDING for a credit card. Account sign up bonuses are a bit grayer but you could see them as advance rebates, but if you then mix it with a deposit account that might bear interest I can see why it would change.

      • kosmo @ The Soap Boxers says:

        Yeah, I wasn’t speaking to the overall issue of the taxability of these miles – just that this particular memo did not state what was being asserted by Chris.

        The issue of rebates vs. income with these miles is likely covered by a separate memo (or will be very soon).

  12. KyBash says:

    If I were ever stupid enough to have a Citi account again, I’d be smart enough to sue them for false reporting because if I can’t use the miles, can’t redeem them for cash, and can’t sell them to someone else, it isn’t actual income.

  13. Murph1908 says:

    Next year, the ‘savings’ you get for using your shoppers card at your grocery store will be taxible income.

    It shows the YTD total right on the bottom.

    Good thing I use Jenny’s card. Jenny don’t change your number.

    • longfeltwant says:

      I hope so. I want those stupid cards to shrivel up and die. I specifically choose local grocery chain Woodman’s (in Wisconsin) because it eschews club cards.

      • Murph1908 says:

        I hadn’t thought of that fantastic side effect.

        Just do as I do. Use the local area code, and 867-5309. It’s worked everywhere so far.

    • axolotl says:

      Ricky, don’t lose that number!

  14. TuxthePenguin says:

    I’ve got a different take on why they are doing this and its probably not on the flying-to-earn-miles side of things.

    When Citi grants frequent flier miles for using its card, it probably has an expense that it pays whatever airline it is granting them to (since the airline is technically incuring a cost, I doubt they’re doing it for free). An IRS or tax audit probably said that since they are recognizing that cost on a tax basis, it needs to be reflected as well (common tax concept is that if someone bears the expense, someone must recognize the income). Who is actually earning that? Those getting the miles.

    That’s the only way I could see this happening. I’ve never seen it (and I’m a CPA as well) but that’s the only thing that makes sense.

    • AustinTXProgrammer says:

      Miles on a credit card are rebates and generally not income (from what I have read, I’m not a CPA). When on a checking or savings account it sounds awfully close to interest.

    • SBR249 says:

      While your principles are sound, the application is flawed.

      The airline in this case (as is standard for almost all non-airline programs/cards that grant miles) sells those miles to Citi in bulk at pennies per mile (it’s a major source of revenue for airlines). Citi then doles them out as part of rewards programs. So in this case, Citi is bearing the cost and the airline is earning the revenue from the miles and treating it as income (ie paying taxes on it).

      So in summary:

      Citi pays airline = expense for Citi
      Airline getting paid by Citi for miles = income that is taxed

      Principle satisfied.

      • TuxthePenguin says:

        Ah, I didn’t get how Citi got those rewards. I assumed it backwards.

        Then I have no clue how unless the IRS has said otherwise but doesn’t want to admit it. That wouldn’t surprise me.

  15. td45 says:

    WTF! I just got a new AAdvantage citicard a few months ago and got a 75k bonus miles deal. No way am I paying $1875 in taxes for that.

    • Polish Engineer says:

      You would pay taxes on $1875, not of $1875. It would this value taxed at the marginal rate of your current bracket.

  16. rockelscorcho says:

    It may be taxable, but that doesn’t mean I’ll bother declaring it. The whole tax exercise is confusing enough already.

  17. Guppy06 says:

    If they’re given a flat value for tax purposes, then they must be redeemable for cash at that value, right?

    • longfeltwant says:

      No. I can tell you aren’t a CPA. (Neither am I, but then again I don’t try to invent my own systems of accounting.)

      If you win a brand new car on a quiz show, you owe taxes on the price of the new car, not the price you could sell it for when you get home.

      I’m pretty certain you are allowed to decline the gift if you want to. Just say no thanks, I don’t want the miles.

  18. ned4spd8874 says:

    So what I’m reading here is that I should only pay “$.025″ for each mile of flight travel that I book???

    • longfeltwant says:

      That’s exactly, precisely the amount I (would) pay for miles on Alaska Airlines: $25 for 1000 miles.

      • asten77 says:

        Except i bet you can’t come anywhere near $.025 in value redeeming them. Do you get to deduct the loss?

  19. humphrmi says:

    You can dispute a 1099 with the IRS, and then exclude it from your taxes (with a statement attached explaining the situation). The following discussion covers an invalid 1099 from a previous employer, however the concept is the same: you dispute the valididity of the 1099.

    http://www.justanswer.com/tax/35gy2-dispute-1099-misc-company-worked.html

    Basically, you send a dispute to the IRS. They send the company another form to fill out to resolve the dispute. While that’s happening, you can withhold reporting that 1099 on your tax forms.

  20. Jim M says:

    I maybe way off base, is this a way for Citi to take a huge right off come tax time?

  21. longfeltwant says:

    Of course they are taxable. You were given something with value; that’s called income. Duh. The fact that people have been free-riding and skidding by on their taxes in the past, doesn’t mean the IRS will continue to let you do that in the future.

    I wholeheartedly support this taxation and I hope they extend it to other things, such all other “rewards” cards. I hope that, because I hate all this “rewards” nonsense, and want it to go away. JUST CHARGE ME LESS thankyouverymuch.

    • Bsamm09 says:

      I agree if they are given before any purchase is made but rewards that accumulate as you spend are rebates and not income.

      The 2002 statement that is quoted is when business miles are earned in a trade or business and then given and used personally.

    • moderndemagogue says:

      I am going to use the argument from the latest episode of the Good Wife, which argued that since something is non-transferrable, it is not a currency, and say that because Sky Miles are not transferable they can’t count as income.

    • castlecraver says:

      I disagree strongly. It is income when and if you realize the income. As has been mentioned here several times, you generally lose the uncashed miles/rewards if you cancel the card. The bank and/or airline can also invalidate your miles for almost any reason. (and I don’t suppose they’d be sending you a 1099 for the loss). Therefore, miles sitting in an account should only be income once they are used.

  22. Jawaka says:

    To be fair, Its not up to Citi to say what’s taxable and what isn’t. That’s up to the IRS. So if this is a requirement which I would think it would have to be then it’s the IRS that people should be complaining to.

  23. Lyn Torden says:

    These rewards ARE taxable if Citi is writing them off as a business loss.

  24. Bob Lu says:

    If it means that it is a crime for airlines to take my points (now with cash value!) away without my expressed agreement, I’m perfectly happy to pay the tax.

  25. eturowski says:

    If the IRS is going to tax people on credit card rewards, then credit card fees and penalties should be tax-deductible.

  26. Sam2k says:

    Credit card rewards are not income. They are purchase rebates. Alternatively, they could be viewed as a return of the capital invested in whatever product is purchased. Therefore, they would only be taxable if you subsequently sold the item for more than the purchase price less credit card rewards.

    Bank account bonuses are appropriately treated as interest.

    • MyopicRaiderfan says:

      Bingo, not rocket science. I opened a Chase checking account and received $150 of taxable interest. I opened a Chase credit card and received $300 bonus that is a refund on purchases. $150 of taxable income.

  27. cspschofield says:

    I question whether this is Citi’s policy. I seem to recall a minor flap a while back (could be as long as a decade, I’ve been busy) having to do with the IRS suddenly deciding that frequent flier miles were taxable. I don’t remember the details, but if that’s the case Citi may simply be trying (which, with the tax code the way it is, is about the best you can do) to conform to the tax lay as it has been explained to them.

    What does anybody else remember about this?

  28. Shorebreak says:

    So I am now required to pay Federal Income Tax on $625 that I used the 25,000 miles, which I received for opening a credit card account, on which normally is a $400 flight. Makes perfect sense to me in this confusing world of taxation and corporate bean counters we are living under.

  29. Slatts says:

    This is interesting, because, as I found out after I donated a few hundred about-to-expire miles to charity (I picked the Red Cross), donations of FF miles are not tax deductible!

    I had even done some homework in determining a dollar value for the miles since the airline didn’t provide one, and used a fairly conservative $0.02 per mile (slightly less than the amount Citi is using). However, come tax time, I learned that I could not deduct this gift because the IRS’s position is that this is actually a gift from the *airline* to the charity.

    It would seem that we’re getting screwed at both ends on this one.

  30. Southern says:

    Sooooooooo………

    I buy the Sunday paper every week for the coupons.

    The newspaper, as a way of advertisement, puts “Over $2,500 worth of coupons inside!” to encourage people to buy the papers (for the coupons).

    Does this mean that I have to claim $10,000 a month in income?

    (This post is only ¬Ω sarcasm).

    I doubt Citi’s policy is going to be around for long.

  31. AEN says:

    Do I have to pay taxes on all those coupons contained in the newspaper? Some posters here claim they’re “income” not spent.

  32. SamiJ says:

    If the miles were taxable -Shouldn’t it only be the redeemed miles that are taxable?
    Unredeemed miles are not worth anything. They have no value at all unless used.

    • castlecraver says:

      Absolutely. Further, if you close the account without cashing the miles, you generally lose them. The bank and/or airline can also invalidate the miles for almost any reason (and I don’t suppose they’ll be sending you a 1099 for the loss). Just as if you had a stock share that appreciated in value — until you sell it and actually realize the profit, there’s no way to tax imagined income.

  33. akronharry says:

    Dear Citi,
    I have this really great idea for you to save money. Quit sending me your stupid convenience checks every two weeks or so. I get this garbage and offers from them all of the time. My favorite is getting my monthly balance mailed which shows a zero balance. I have not used their card in years after they had shortened the grace period (before the new laws went into effect).

  34. castlecraver says:

    OK, so long as that free income you realized in the Caymans is taxable too. Fair?

  35. thomwithanh says:

    Where are they getting this $0.025 figure? Most airlines value frequent flyer miles on their books as a fraction of a penny a piece.