WARNING: Your Bank is about to Tax your Airline Miles
As someone who collects hundreds of thousands of airlines miles every year, I’ve enjoyed the benefits that they bring. For years now, the IRS has ruled that airline miles are not taxable income.
I had always feared this day would come, but in my heart, I never really thought it would have any legs… until now.
Ben received a curious letter in the mail (actual mail, not email) today from BankDirect. For those of you that aren’t familiar with BankDirect, it’s based out of Richardson, TX, a suburb just north of Dallas. Since they’re so close to the headquarters of American Airlines, their bank is a little different.
Instead of earning interest on your checking and savings accounts, you can earn American Airlines AAdvantage Miles.
For every $1,000.00 of the balance in your checking account (up to $50,000) you earn 100 miles a month. That means that if you kept the full $50k in your account, you would earn 5,000 miles a month or 60,000 miles a year. Not a bad haul!
The letter that arrived today, I think, is a harbinger of bad things to come, and we’re planning on fighting with every ounce of our being. Below is the photo scan of the letter but I’ve included the text here as well. Bolding is my own:
We truly appreciate your business and thank you for being a loyal BankDirect customer. We wish to inform you that under current tax law, we are now required to report to you and the IRS the value of miles you receive from BankDirect. If you receive miles from BankDirect on or after January 1, 2020, we will issue the appropriate form 1099 to you and the IRS in January of 2021. Since American Airlines AAdvantage miles do not have a defined cash equivalent and the value they represent is subject to various factors specific to each American Airline Advantage member, the amount reported will be based on our good faith estimate of the market value. The estimated market value can be impacted by numerous factors and may materially change prior to the issues of form 1099 each year.
Bank Direct is not an account firm or law firm and does not provide tax or legal advice. Please consult with your tax advisor regarding the tax implications of this information.
We appreciate your trust and continued support.
Vice President, Manager
Client Onboarding & Service Delivery
I’m going to give you a moment to pick yourself up off of whatever floor you just fell onto.
This. Is. A. Big. Deal.
Dissecting the Letter
Interestingly enough, the letter references current tax law, and because of that current tax law they must start reporting next year all the miles that they give to their members. On top of that, you have no say in what BankDirect thinks the miles are worth. You’re at the whim of the bank to whatever value they assign.
This is very interesting considering in an IRS publication from 2002, the IRS made it clear what they felt about the value of airline miles. Bolding, once again, is my own.
Questions have been raised concerning the taxability of frequent flyer miles or other promotional items that are received as the result of business travel and used for personal purposes. 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 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, or in other circumstances where these benefits are used for tax avoidance purposes.
Now, the parts that I bolded reference the IRS’s stance on miles resulting from business travel. In the last section, it mentions that the relief does not apply to promotional benefits that are converted to cash, paid in the form of travel OR other promotional benefits. But, what exactly does that mean? What is a “promotional benefit?” and will it be taxed?
Good Faith Estimate
The bank states that they will use a GFE, or Good Faith Estimate, to determine the value of the miles that they’ve issued to you. Who’s to say that the miles I am accumulating have a cash value of $.01 each? What if the value I get out of the miles only gets me a $150 flight? What about a $1500 flight? There has to be some baseline level.
What if I am only accumulating the miles but don’t intend on using them for another 2 years?
What about the cost that BankDirect is paying for those miles. Shouldn’t that come into play?
Disputing the 1099
Just because a company sends you a 1099 form, it doesn’t mean that you are without your rights. This website here outlines the steps to dispute a 1099 if, for whatever reason, the pricing doesn’t look right when they sent it over.
- Gather your supporting documentation. If you believe that the amounts are incorrect, make sure to have your proof.
- If the company doesn’t correct your 1099 after you have requested it, call the IRS at 800-829-1040 and explain your situation. They will reach out and requested a correct 1099.
- If the company doesn’t reply by April 15, you may claim the amount you believe is correct on your tax return without a new 1099.
- Write a statement explaining why and attach it to your taxes
How will you know what a true good faith value is?
This truly is where the problem lies. If I were to jump over to American Airline’s website right now and look for a flight, what can I find for 50,000 miles? Let’s assume that the bank wants to charge me 1 cent per mile, so a total of $500.
Here’s a flight, tomorrow, on American Airlines from Seattle to Phoenix. You can see that it is 50,000 miles.
But, if you went to the American Airlines website to look at the cost of this ticket, you’ll see that the same flights are only $156.30. Does that mean that the cost of my miles is only $156? Or is it $500 because that’s what the bank says I should have got for it?
Previous Court Cases
Shankar v Comissioner
Back in 2014, Citibank sent a 1099 for Thank You points to a customer in New Jersey. The long and the short is that the IRS sided with Citibank in sending out the 1099 for points that he redeemed for a flight. Note, he redeemed the points for a flight that had value, they weren’t simply deposited into the account and then taxed.
Northwest v Ginsberg
In short, the courts ruled that frequent flier programs are not “prices, routes, or services” due to their changing nature. So, how can you put a price on something that intrinsically doesn’t have a price or a service?
So, what happens now?
I suppose this is the hurry up and wait portion of this post. Starting January 1st, we won’t have much of a choice. All of us who have BankDirect accounts are going to start getting these 1099 forms.
But if you don’t have a BankDirect account, should you be worried? I’d say yes, you probably should. The letter references “current tax law” which as far as I can tell, hasn’t laid out any changes to the frequent flier mileage programs… unless someone can find me something different?
If this manages to stand, what’s to stop American Express, Chase, Citibank, and other institutions from taxing these rewards as well?
I’m curious to hear some legal / tax professionals out there chime in the comments section below. What can we expect in the coming year from this?