Miles, Membership Rewards and the IRS: What’s In Your Tax Bill?

By Robert McGarvey

Probably you thought – as I did – that the 2002 ruling by the IRS that it couldn’t figure the value of airline miles and therefore it wouldn’t tax them settled matters with a clear principle: Miles do not incur tax consequences.

My certainty vanished as I read the fine print associated with a 20,000 Membership Rewards points offer from American Express.  Deep in the document I read this: “The receipt of Membership Rewards® points through this offer may be considered taxable income to you and may be reported to the IRS on Form 1099. You are responsible for any federal or state taxes resulting from this offer.”

Now do we have your attention? It certainly got mine

I started by reading exactly what the IRS ruled: “Consistent with prior practice, 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.”  

There’s a twist in that statement: “attributable to the taxpayer’s business or official travel.”  Are miles earned in personal travel taxable?

Presently they aren’t.  In most cases. That’s because, to quote a CPA firm: “The IRS has stated that they will not tax miles that are earned through travel with an airline or by using a credit or debit card because those miles are deemed nontaxable rebates.” That’s as true for personal travel as business travel.

But there’s another twist: “This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits….”

Another CPA firm notes this: “When you receive an offer that promises to give you 30,000 miles for opening a new checking account, pause. Realize that this may cost you tax before you jump at this tempting offer.

“Since you don’t have to spend any of your own money to earn the frequent flyer miles, they are considered a gift, not a reward.”

A third CPA firm elaborates: “in Shankar v. Commissioner, the U.S. Tax Court sided with the IRS, finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed the rewards points to purchase airline tickets.”

Which means that, yes, potentially the Amex 20,000 point bounty could be taxed. It seems clearly to be a gift for signing up for pay over time.

But why is Amex issuing a 1099 – which is required when amounts are $600 and more.  

20,000 Amex miles is a sizable clump – that’s why I was eyeing this pay over time offer even though I have no intention of actually paying over time. I just wanted the miles – so, yes, I value Amex miles. But, personally, I see no way that haul can be valued at $600. My calculation is $200. Even using The Points Guy’s generous calculations, it’d only be worth $400.

NerdWallet adds that if Amex miles are used to shop at Amazon the value dips to 0.7 cents which amounts to $140 for 20,000 miles.

There is no way to put a $600 value on 20,000 membership rewards points.

But the IRS does not prohibit issuing 1099s for amounts below $600. So Amex is well within its rights to issue a 1099. But why?

The value of the Amex points is uncertain and, besides, by some estimates, 90% of airline miles are never used. Other estimates say 40% of miles aren’t used.  Either way, lots of miles and points never get put to use and their value has to be put at zero.

My calculation is that – valued at $200 – my federal and state tax consequences of a 20,000 mile gift for signing up would amount to maybe $100.  Of course that is no big deal.

It is however opening a Pandora’s box. What else might be taxed?

So, for now, it has halted my signing up for pay over time. At least I won’t miss having that option.

But one thing is certain: I will always read the fine print with points and rewards offers.