The question of the taxability of frequent flyer miles, rewards points, and cell phones vary, with the IRS Code providing no or vague guidance on some of the above areas and clear guidance on others.
Frequent Flyer Miles
The IRS Code and the regulations do not address the taxability of frequent flyer miles. We feel that the most on-point guidance is found in Announcement 2002-18. It specifically addresses frequent flyer miles and reads, in part:
There are numerous technical and administrative issues relating to these benefits on which no official guidance has been provided, including issues relating to the timing and valuation of income inclusions and the basis for identifying personal use benefits attributable to business (or official) expenditures versus those attributable to personal expenditures. Because of these unresolved issues, the IRS has not pursued a tax enforcement program with respect to promotional benefits such as frequent flyer miles.
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. Any future guidance on the taxability of these benefits will be applied prospectively.
This 10-year-old announcement seems to represent the most recent meaningful authority on the taxability of frequent flyer mile awards, but it does not provide much clarity to the law, or even an interpretation of the law, and instead merely indicates the IRS does not plan to pursue enforcement. In addition, the announcement deals only with frequent flyer miles a taxpayer earns from business or official travel, not with frequent flyer miles given to a taxpayer as part of a product promotion. The IRS has seemed willing at times to give taxpayers a pass on certain items that are relatively modest in amount, involve subjective estimates of value, and are difficult to enforce.
In regards to frequent flyer miles given to a taxpayer as part of a product promotion we feel that the IRS's response to a recent occurrence addresses this issue. Earlier this year Citibank surprised many of its customers by issuing Forms 1099-MISC, Miscellaneous Income, to report the value of frequent flyer miles the customers had received in exchange for opening new accounts as part of an ongoing promotion. Understandably, the customers were upset because, the value of the miles notwithstanding, many of them ended up paying dearly (through potentially as much as several hundred dollars in taxes) merely for opening an account.
The IRS confirmed that Citibank was correct in sending out the 1099 for giving away miles as a sign-up bonus. "When frequent flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law," IRS spokeswoman Michelle Eldridge said in a statement e-mailed to CreditCards.com.
According to the IRS depending on how you obtain them, rewards may be taxable as income. The traditional rewards points earned when making purchases with credit cards or debit cards are still tax-free. Rewards that are given away as part of new banking account recruitment drives are considered income and can be taxed. If the value of those taxable rewards is more than $600, banks are required to send 1099 tax notices to both the IRS and the rewards recipient.
Traditional rewards are tax free because they are tied to purchasing something with a payment card. Many of the promotions currently on the market offer rewards points to sign up for credit cards with a caveat that the applicant must make a minimum amount of purchases within the first few months of opening an account. Those rewards are contingent upon spending. They are considered a reimbursement of the fees that you are paying in association with being a member. Accordingly, it's a rebate of your fees and therefore not taxable.
If, however, the reward isn't tied to purchases, it is taxable income and if it is more than $600 must be reported by the givers to the IRS on a 1099 tax form. So when a customer receives a gift for opening a bank account -- whether cash, a toaster or airline miles -- the value of that gift is generally treated as income and subject to tax reporting. This is separate and distinct from miles or points earned by credit card customers for their purchases.
Rules related to employee use of company-provided cell phones were relaxed through two changes. The first was statutory, with the delisting of cell phones as listed property via the Small Business Jobs Act of 2010, P.L. 111-240. The second was Notice 2011-72, which stated the IRS deems the value of employees’ personal use of cell phones provided by employers for non-compensatory business purposes to be excludable from income. Contrast this with previously issued Announcement 2002-18 discussed above, in which the IRS did not indicate the proper treatment but instead merely stated its intention not to pursue enforcement.