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.
Whenever you receive something as a bonus, whether it was a gift card from your employer to the frequent flyer miles from this article, the government believes you received value for it. Therefore, the amount of the “bonus” is income to you. They call this Imputed income. One of the best examples is for life insurance. Anything over a basic $50K policy is added to your taxable wages as Imputed income.
If you have further questions, visit EasyWebTaxes.com.
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I think when you make extra on a paycheque, the coemutpr figures out the tax rate as if you made that amount every week. I know we had issues with this when my husband used to work a lot of overtime. You’ll likely get some back next year at tax time.
btw, MarioP, in case Phil doesn’t answer, I have some ansrews for your questions to him:And are those who can’t get health insurance for their pre-existing condition or the ones that had their healthcare cut off due to high healthcare bills “undeserving and unwilling to work for it”?- Answer: MEDICAID. All 50 states have it and this person would qualify, if their income was “low” enough (e.g., in NY, $88,000 total household)What would you do if you had cancer and all of a sudden lost your job due to the poor economy, who would insure you then?- Answer: MEDICAID. I was an oncology nurse. I have seen this situation many, many times.What would you do if you had to fork out tens of thousands in medical bills to keep your wife in cancer therapy?- Answer: Hopefully you saved enough for that “rainy day” which costs the same as a new car. Otherwise, get a “paper divorce” and declare that you are not willing to pay for her cancer care. Then she will get MEDICAID. (I’ve seen that many times too, just ask any hospital social worker.)Have you not heard people having to sell their homes to pay for healthcare?- Answer: So what? Is your house more important than the family that lives in it? Owning a house is not so important in the scheme of life. Just be glad you even have a house to sell to help pay for healthcare for a loved one. Get your priorities straight!Where were those god fearing, charitable people to help them out?- Answer: PLENTY. Just ask any hospital social worker. They are a WEALTH of up-to-date information on getting financial and social assistance from foundations/charities set up by RICH PEOPLE TO HELP YOU IN YOUR TIME OF NEED.