Miles And Taxes: Is There Any Reason To Worry (Probably Not)

Note: I am not an accountant. Nothing that I write below should be taken as tax advice. And if you’re getting tax information from a guy on the internet, you should probably rethink your strategy.

 

I got a question from a reader the other day asking if taxes could spell the end of the frequent flyer game. She’d seen on another blog that Chase was sending out 1099-MISCs (miscellaneous income that you received for performing services) for referral bonuses (points that a company gave you for referring a friend to their product). There’s a short thread on Flyertalk, as well, discussing the issue. Combine that with Doctor of Credit’s piece about American Express also sending out 1099s and you could get nervous that the government is going to start taxing frequent flyer miles.

What’s Going on with Tax Forms?

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Your bonuses might get a bit more complicated this year

Banks have, in the past, sent out tax forms if you earned more than $600 in sign-up bonuses for opening accounts with them. This is the first time, though, that I’ve seen financial service companies sending 1099s for points that you earned by referring a friend to their credit card. Previously, it had always been tax forms only for cash, and only for opening a new bank account.

This year, Chase and American Express have stepped it up:

  • If you earn points from Chase for referring people to a credit card, they are valuing those points at 1c each, according to Flyertalk. The problem is, it doesn’t matter what kind of points those are. In other words, Chase values a Marriott Rewards point the same as its proprietary Ultimate Rewards points, even though the former is worth much less than the latter. Thus, any bonus of 60,000 points or greater, regardless of the type of points, is going to get a 1099.
  • American Express is valuing all referral points at a penny each, with the exception of Hilton Honors points, to which they assign a 0.67c value (I value Honors points at 0.4 cents each.)

It’s important to remember that these 1099s are only for referral bonuses. According to this article, you don’t have to worry about your credit card sign-up bonus being taxable if you had to spend a certain amount of money to get that bonus (e.g., “Spend $3,000 in the first three months and you’ll get a 50,000 point sign-up bonus.”).

Remember, consult your accountant on how you should value these points or what taxes you may owe.

Is This The End Of The Mileage Game? Probably Not.

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My reader asked if the 1099s from Chase signal an end to the mileage game. If the bank says that referral points are taxable, what’s to stop them from claiming that all points, no matter how you earned them, are also taxable? If points or credit card rewards become taxable, that significantly degrades their value. The short answer is that you (probably) don’t have much to worry about. Here’s why:

  • Remember, financial institutions don’t want points or reward to be taxable, and that any attempt by the government to expand taxation of rewards would be met with a fierce lobbying effort, not to mention Congress-critters, who also like their rewards. If the points are less valuable to you, you’re less likely to use their product. My guess, and this is only speculation, is that somebody at the IRS made a few financial institutions nervous about differentiating between money that they were giving you, versus rebates on purchases, and that the banks decided to pass on the liabilities.
  • Absent a ruling to the contrary, credit card points and miles have always been viewed as rebates on your spending, not taxable income. That’s different from referral bonuses or straight-up account opening bonuses, which didn’t involve a purchase on your part.
  • It would be extremely difficult to put a value on points. Who is responsible for determining that value, the airlines or the IRS? If it’s the airlines, what happens if Delta sets its value at 1.5c and United sets it at 1.0c? And if it’s the IRS, what criteria do they use to establish the value?

The points and miles game is simply too widespread for the government to make a successful attempt to tax them. To the best of my knowledge, the IRS could issue a private letter ruling that would make miles taxable, but Congress would be all over that one.

For now, anyway, the greatest threat to the value of your points is devaluation by the points issuers themselves, not taxes.

 

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