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Citibank deems frequent flier miles taxable income

By , CardRatings contributor
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The value of frequent flier miles is coming under fire as Citibank recently issued IRS 1099 tax forms to members who received miles as an incentive to open a checking or savings account. In reporting an assigned dollar value to the miles, the bank is saying those miles represent taxable income. Whether or not the Internal Revenue Service, which also receives notification of the income, agrees with Citibank is unclear.

Citibank customers began receiving 1099s recently, according to the Los Angeles Times. One man reported receiving 25,000 in American Airlines miles when he opened Citibank checking and savings accounts last year, and this year he received a tax form valuing those miles at $645 in taxable income, which represents a 2.5 cent value for each mile. The LA Times reports the man was never informed when opening the accounts that the miles would be taxable.

The IRS does not consider miles earned in the use of an airline credit card as taxable; a 2002 policy from the tax collecting agency stated "numerous technical and administrative issues" relating to miles, such as how they're valued and used, the agency "has not pursued a tax enforcement program with respect to promotional benefits such as frequent-flier miles." But Citibank is asserting the miles earned from opening the checking or savings accounts represent a prize or award, which is taxable. Citibank is not sending 1099 forms for any miles earned by its credit card customers.

Dow Jones Newswires reported that Sen. Sherrod Brown of Ohio sent a letter to Citibank, requesting it stop sending the 1099 form and citing the 2002 IRS policy, but the report says the senator is now unclear whether the regulation he cited was applicable to this case. The IRS does tax prizes and awards valued at more than $600, which is how Citibank is defining the miles it awarded to new customers.

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