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TAX TALK: Does the IRS Tax Frequent Flyer Miles?

Posted by Hal Zemel, CPA, J.D., LL.M. on Sep 6, 2016 11:00:00 AM
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Did you redeem frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway? You might assume that you do not owe any tax. You are probably right; however there are instances when your miles could be taxable.

General Rule — Tax Free
Generally, the IRS treats miles awarded by airlines for flying with them as nontaxable rebates. Similarly, the IRS treats miles and other rewards for using a credit or debit card as a purchase price reduction and not as taxable income.

The IRS partially addressed the issue in Announcement 2002-18, where it said “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.”

Exceptions
The IRS has viewed the use of some types of miles as taxable income. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.

For instance, 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.

The value of the miles for tax purposes generally is their estimated retail value.

If you’re concerned you’ve received mile awards that could be taxable, contact me at HZemel@berdonllp.com or your Berdon advisor and we’ll help you determine your tax liability, if any.

Hal Zemel, a Tax Principal at Berdon LLP, New York Accountants, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

Topics: TAX TALK

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