One of the most commonly asked questions directed to PEYD is whether customers have to report to the IRS the monies earned through cashing-out miles and points or report the value obtained when using miles and points for flights or other redemption options like hotel stays, car rentals or gift cards. This issue is highlighted by the fact that the federal government has yet to regulate the rewards industry and determine the taxable status and overall value of credit card rewards and airline miles.
In 2002, the IRS issued a statement indicating that business professionals would not be held liable for the receipt and personal use of frequent flyer miles or other in-kind promotional benefits obtained by the taxpayer from business or official travel. For the past 10 years, this announcement (although stated specifically in regards to miles and points earned through one’s business and not personal miles earned) was the most meaningful directive on the taxability of frequent flyer mile awards. There hasn’t been any additional clarity on the status of miles and points, the IRS merely indicating that it did not plan to require taxpayers to disclose them on their returns.
Interestingly enough, the IRS doesn’t require taxpayers to disclose items that are relatively modest in value, and looks to the Federal Government to classify and regulate items that are subjective estimates of value, something the rewards industry certainly falls within. And, in fact, the subjectivity and the constant devaluation of miles and points by airlines is actually something currently being investigated by the Department of Transportation.
Thus, more recently, the IRS issued additional guidelines classifying the taxable status of miles and points that it broke down into two different components: a) how an individual obtained miles and points and b) what the individual does with them. In this article we will focus on the first category.
In 2012, the IRS clarified its position and stated that when the rewards are dependent on some kind of financial action, whether it’s meeting a certain spending threshold or even where the rewards are given out after the one purchase, the IRS views the rewards as a discount on whatever it is you purchased initially. It therefore does not consider it as additional monies earned that need to be reported. However, if no transaction is required to earn the rewards, the IRS states the rewards earned must be disclosed and are subject to tax. What’s important to note is that even in the case where the rewards are given without any transaction required, they only need to be reported if they are valued above $600, which is the IRS’s mandatory reporting threshold on income earned by taxpayers.
The IRS is clear that any future regulations will have no impact on past miles and points earned, stating that any future guidance on the taxability of these benefits will be applied prospectively.
Stay tuned for our next article and, as always, please consult your tax advisor with any questions as neither PEYD, its affiliates, nor its employees provide tax advice.
Eli Schreiber is a partner and director of marketing at Get PEYD and PEYD Travel, LLC.
By Eli Schreiber
