Welcome to the second edition of CreditCardAssist’s “Ask the Experts” column! Each week we’ll be answering the burning questions that all of you have about the world of credit cards. In our first issue, we discussed why Adam’s credit limit was set so low on his new card. This week, we’ll be discussing everyone’s least favorite financial chore: taxes.
Charles Toussaint wants to know: “Do I have to worry about my frequent flier miles being taxed as regular income?”
That’s a good question, Charles. As if filing your tax return wasn’t enough of an ordeal already, things can get downright infuriating when you try and add credit card rewards to the mix. You aren’t the only one to ask us about their air miles, either. More than 120 million Americans were awarded a total of $2 billion in frequent flier miles last year, and our inbox has been stuffed with similar questions for the past two weeks.
The experts say:
We’d love to tell you not to worry about your frequent flier miles when filing your 2012 return. Unfortunately, things aren’t that simple. You might actually have to claim your miles as a “cash gift” on your 2012 return. It all depends on how you acquired them and who you acquired them from.
Frequent flier miles can fall into one of two categories, tax-wise. If you earned all of your air miles by using your rewards credit card or airline credit card to make purchases, they’re considered a non-taxable rebate. If, however, you earned them through a promotion – like Citi’s 25,000 mile giveaway – then those miles are categorized as a cash gift, and you’ll have to list them on your return.
While it may seem absurd for the IRS to tax a bunch of intangible miles as if they were cash, you need to remember that these miles do have a cash value that’s determined by either the redeeming airline or the issuing card company. In Citi’s case, they value each mile at 2.5 cents. The IRS requires all of us to list gifts of more than $600 on our returns, and since 25,000 Citi miles works out to $625, the bonus qualifies for inclusion.
This sort of thing happens all the time in the world of contests and sweepstakes. Remember when Oprah gave away those free cars? The 300 audience members were told by the IRS that they had to cough up $7,000 in taxes to cover the sticker price of their new ride, or else they’d have to give it away. In 2005, a man actually had to give up 12 around-the-world airline tickets he’d won in a contest because he couldn’t afford the taxes.
So what can you do about it?
If you earned your frequent flier miles by making credit card purchases, then you can stop reading and go play outside now, because you’re in the clear. But don’t panic if you’re one of the unlucky recipients of a bonus mile package. You can still dispute the value of the air miles on your 1099 form. Just call the IRS and tell them you don’t agree with the assigned cash value of your issuer’s products and that you have been unable to resolve the issue with them. To your actual tax return, attach the letter that the IRS sends in response to your phone call. Negatively adjust the value of the air miles on your return to bring the total back below $600. This doesn’t work every time, but there are documented cases of success.
Even if you have to grin and bear it this year, take heart. This problem doesn’t look like it will be a permanent one. Congressmen are already pushing legislation that prevents frequent flier miles from being classified as anything other than non-taxable rebates. If we’re lucky, the rules could change in time for the 2013 tax season.
That does it for this week’s edition of “Ask the Experts.” We hope we answered your question satisfactorily, Charles. For everyone else out there, remember to submit any and all of your credit card questions to us via our handy contact form. Until next week, good luck and happy spending!
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