Frequent fliers jolted as Citibank says some miles are taxable
Some American Airlines frequent-fliers got a jolt this week after Citibank sent tax forms that listed miles as taxable miscellaneous income.
The Associated Press reports the 1099 tax forms "were sent to customers who were given American Airline miles for opening a checking or savings account last year. That"s causing confusion — and possible concern — among those who never before reported their frequent flier miles and other credit card rewards as income."
The Los Angeles Times writes the AA customers who received the 1099 tax forms from Citibank now could be "on the hook for paying related taxes or possibly facing a greater risk of being audited."
How did this issue surface in the first place?
The AP notes that – generally -- frequent-flier miles given as credit card rewards have not been considered taxable "because they"re treated as rebates on spending, according to the Tax Institute at H&R Block."
IN-DEPTH: Paying taxes on points: Citibank sends tax forms for sign-up bonuses (ThePointsGuy.com)
However, the catch in this situation is that miles doled out as a "reward" for opening a new checking or savings account may be viewed differently. The AP says that"s because "you don"t spend any money to receive it," meaning it"s not really a rebate on spending.
"So the gift is instead treated similarly to interest income, meaning that it"s taxable," AP writes.
"When a customer receives a gift for opening a bank account — whether cash, a toaster or airline miles — the value of that gift is generally treated as income and subject to reporting," Citibank says in a statement to AP.
IN-DEPTH: IRS clarifies its stand on whether airline miles are taxable (L.A. Times)
What"s the take from the IRS?
Spokeswoman Michelle Eldridge on Monday acknowledged to The Hill publication that the IRS declared in 2002 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."
However, Eldridge pointed out to the Hill that the account-opening bonuses could be viewed differently.
"When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law," Eldridge says to the Hill.
The apparent room for interpretation has left many scratching their heads on the subject.
On that topic, the Times writes "it"s worth noting how confusing the issue is even for those with a deep knowledge of tax law. Financial experts weren"t sure what to make of Citi"s claim that frequent-flier miles are a prize or award and thus represent taxable income."
One of the more notable voices of dissent on the topic is coming from Congress.
The Times writes "Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, was so flummoxed that he wrote a letter to Citi"s chief exec, Vikram Pandit, calling on him to stop sending miles-related tax forms to customers."
"The last thing Citibank s