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Are your frequent flyer miles taxable?

frequent flyer miles, taxIf you have traveled with a major airline recently or opened a new credit card, it’s very possible that you have received frequent flyer miles. While you were dreaming of where those miles might take you, you may not have stopped to ask whether those miles are taxable.

Fortunately, frequent flyer miles are generally not taxable. The IRS has stated that they will not tax miles that are earned through travel with an airline or by using a credit or debit card because those miles are deemed nontaxable rebates. This is a taxpayer-friendly approach and businesses generally try to structure these incentives in this way to avoid creating a taxable situation for their customers; however, a recent tax court case shows that isn’t always the case.

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In 2014 in the case of Shankar v. Commissioner, the tax court ruled that the “thank you points” that a bank offered to its customers were structured more like interest for the use of funds rather than nontaxable rebates and were taxable to the customers that received them. This has created some uncertainty and could open the door for more litigation in this area in the future, but in general, the IRS has not shown much interest in changing their approach to the treatment of frequent flyer miles and points.

Keep in mind, however, that the IRS’s policy not to tax frequent flyer miles doesn’t apply if the mileage (or other promotional benefit) is converted to cash. In that case, the IRS will require that you treat the cash as a taxable fringe benefit. But if you are merely using frequent flyer miles earned through travel or credit cards, you can do so without having to worry about any tax consequences.

Michael Anderson, CPA

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