Airline Miles and your Income Taxes

This is a question I am often asked:

Are Airline Miles taxable?

It is a legitimate question. Airline Miles are an asset. They do have value. You can redeem them for something else of value. You can even split them up in a divorce. The question of taxation of airline miles as Income becomes even more concerning if you are earning miles for trips pain for by your employer. After all, you are then earning the miles on your employers dime (and time) and are earning them while performing your duties towards your job. Would the miles earned then not be considered income or compensation? After all, if your employer gives you a reward which has tangible value – say a trip or a car – they have to add its value to your W2 or 1099. Why not miles?Now before you jump to the answer I have found thru my research, I want to point out that I am not a tax attorney, a tax advisor or even an accountant. Please consult your tax advisor or accountant before taking any decisions regarding your taxes. Anyone who knows anything about the IRS will agree that there is no simple yes/no answer to anything related to taxes. I am sure you heard this one:

For every tax problem there is a solution which is straightforward, uncomplicated and wrong.

Here is the summary of what the IRS has to say on the topic of taxation of Airline Miles:

The IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.

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My research on this topic led me to Prof. Paul L. Caron. He is the Associate Dean of Faculty and the Charles Hartsock Professor of Law at University of Cincinnati College of Law. He has a great post on his blog where he discusses the Taxation of Airline Miles in detail, with all references to IRS memos and announcements on the topic. Please read his blog post or pass it on to your tax advisor or accountant for their reference. I exchanged emails with Prof. Caron to take his permission to reference his blog post here and also to verify that information in the blog post was the current information on this topic. He has verified that it is.

In Summary, here is what I have understood from my research:

  • Airline Miles received and used for your personal use are not taxable, even if you earn them when on business travel
  • This exemption does not apply if you sell or trade or barter the miles

The second point does leave some grey area. As I pointed out in my blog post on Buying, Selling and Trading miles – if I redeem my miles to get my brother-in-law a free trip to the Caribbean, would it be considered that I sold or bartered the miles if he brings me back a case of rum to show his appreciation? I hope not…Reminds me of this one:

The tax advisor had just read the story of Cinderella to his four-year-old daughter for the first time. The little girl was fascinated by the story, especially the part where the pumpkin turns into a golden coach. Suddenly she piped up, “Daddy, when the pumpkin turned into a golden coach, would that be classed as income or a long-term capital gain?”

Now, I have to get back to TurboTax. Only 11 more days to go to April 15th.
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Pingbacks

  1. […] It’s that time of the year again. The 1099′s, W2′s and other tax forms have started showing up in the mail or email. This is also about that time I start getting questions form my readers and friends about the tax implications of all the miles they have earned or redeemed. I posted this article on taxes last year and to the best of my knowledge, there have been no changes to the tax law that would impact your taxes in any way, by way of miles. Read on… From April 2010: Airline Miles and your Income Taxes […]

Comments

  1. Key words: “sell or trade or barter”

    So you must make money or something similar – if you barter them.

    All you did was give a gift. You earned nothing other that good will from your in-laws. This has “no value” ( according to the IRS and maybe others as well! ).

  2. Airline Miles received and used for your personal use are not taxable, even if you earn them when on business travel
    This was stated in your article above…Here is my question.

    I redeemed 390,000 Capital One rewards miles in 2011 from a Rewards Money Market account. Capital One charged me 1% or $3900 for redeeming those rewards and is sending me an interest 1099 form with $3900 of interest to be taxed for 2011. I assumed rewards miles were free to redeem and did not know about this redeeming fee. Any comments from others? Do you know of any other money market rewards accounts where you are not charged to redeem your rewards?
    Thanks in advance.

  3. Cindy, From the current comments I have seen to this thread it seems that miles earned from a Bank Account (not Credit Card) result in a 1099. I do not understand your scenario where they sent you a 1099 when you redeemed (instead of when you earned). You may want to consult an accountant.

  4. Do you know of any Reward Bank Accounts that don’t charge you to redeem (or earn) rewards and thus do not send a 1099…meaning the rewards are free to use. Capital One said on there credit cards the rewards are free and do not generate a 1099.

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