By Jonnelle Marte
Frequent-flier miles awarded for opening new accounts sometimes come with a big catch: taxes
Thousands of Citibank customers received notices in January saying the miles they received for opening new accounts in 2011 produced taxable income. Some customers, for instance, received a 1099 with $750 of income for 30,000 miles, the Wall Street Journal reported. The IRS confirmed they are taxable. Such bonuses are often enough to book a domestic flight or they can cover an upgrade to business class from coach. But analysts say the actual trips booked with the miles can be worth less than the amount of income reported by the credit card company. And the tax bill could cost more than the flight itself, says George Hobica, president of fare-tracking site AirfareWatchdog.com. “It might be a wash, depending on your tax bracket,” says Hobica. “I certainly wouldn’t do it.”
For instance, a traveler redeeming 30,000 frequent-flier miles would typically qualify for a domestic flight on off-peak travel days, says Hobica. Paid for in full, such a flight could often cost $300 or $400, he estimates—much less than the $750 in income being reported for some Citi cardholders. Flights that would cost more, such as international trips or those booked during the holidays, could require twice as many frequent-flier miles, he says. Travelers should keep these tax consequences in mind since sometimes the resulting tax bill could be close to or more than the full amount of the ticket, says June Walbert, a certified financial planner with USAA in San Antonio. For instance, someone in the 35% tax bracket could end up paying more than $260 in taxes for 30,000 miles. “You have to figure out what it’s going to actually cost you to get those miles,” says Walbert.
Of course, many travelers still walk away with discounts from such reward miles. At times they can make the difference between flying coach and business on a long international flight, adds Walbert. And since fares are constantly changing, travelers using reward flights may get more bang for their miles, says Hobica. Citigroup said in a statement that when a customer receives a gift for opening a bank account, the value of the gift is generally treated as income and subject to reporting. The value assigned is often in line with what it would cost travelers to purchase those miles through the airline.
Travelers should focus on racking up miles through credit card purchases or for traveling, which aren’t considered taxable, says Walbert. Even some miles rewarded for opening new accounts can be considered rebates when the card has an annual fee and are generally not considered taxable income. Some consumers can also earn miles for shopping through an airline shopping mall, says Hobica.