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IRS says some airline-mile offers taxable

Posted by Paul Makishima, Globe Assistant Sunday Editor  February 1, 2012 10:01 AM

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Who knew? It turns out that any frequent-flier miles you get for opening a bank account are taxable, according to published reports.

However, the miles you rack up for credit card purchases or for actually taking a flight apparently are tax-free, the IRS told the Los Angeles Times.

The issue emerged as consumers who had received American Airlines miles as a "sign-on'' bonus for opening Citibank checking or savings accounts last year began receiving 1099 tax forms from the company, valuing each mile at about 2.5 cents. If you're wondering about the bottom line, consider this: 25,000 miles, which is what you'd need for a round-trip domestic flight, would equal about $625 in taxable income.

Why are some miles taxable and others aren't? This from the Times:

"When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law," said Michelle Eldridge, an IRS spokeswoman ...

But what about miles received for using a credit card or handed out by an airline just for taking a trip?

Eldridge said that in those cases, miles wouldn't be taxable because they're more like a rebate.

"A common analogy," she said, "is buying a $500 television at a retail store and receiving a $50 manufacturer's rebate. It's not income, just a deemed reduction of the cost of the television."

By that criteria, it would appear that offers for free miles for signing up for credit cards -- or any similar deal with any kind of valuable inducement -- should also be taxable. Stay tuned.

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