If you're a Citibank customer, especially one who opened an account last year as part of a promotion that included frequent flier miles as a bonus, you are in for a tax surprise.
One of the tax statements you just received is a Form 1099-MISC from the financial institution informing you that you owe taxes on the value of the amount of miles you were awarded.
Welcome to the world of tax semantics.
While the Internal Revenue Service determined back in 2002 that frequent flier miles are not taxable, Citibank is now arguing that this version of the travel perk is because it's a gift, analogous to a taxable prize.
A spokeswoman for the IRS has acknowledged that Citibank might have a point. "When frequent flyer miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law," IRS spokeswoman Michelle Eldridge said via email to media after questions were raised about the 1099s.
At least one federal lawmaker, Sen. Sherrod Brown of Ohio, has written Citibank and demanded that it stop sending out the 1099s. "Your actions are leaving working families with the seemingly incorrect impression that when they rack up miles, they are hiking up their taxes, too," wrote the Democratic chair of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection to the Citibank CEO.
Is the senator, a federal lawmaker who helps write tax laws, correct? Or is the IRS, the agency tasked with administering such laws?
And what do you do in the meantime while the matter is being hashed out?
The best result for recipients of the 1099s would be if the IRS issued a statement clarifying the possible taxable mileage amounts -- Citibank has valued each mile given customers for opening new accounts at 2.5 cents apiece -- as either taxable or not taxable.
Even if the IRS says Citibank customers have to pay, at least the matter would be settled.
Or Brown and his Capitol Hill colleagues could pass a bill that specifically absolves the bank customers of any tax liability in this and future frequent flier cases. That could happen, although lawmakers have a lot of other tax laws to worry about -- remember the payroll tax extension ends at the end of February -- right now.
The best advice, at least in the short term, is to include the 1099 amount on your Form 1040. The main reason is that the IRS got a copy, too, and when it processes your tax return, any discrepancy in amounts you report and amounts it knows thanks to third-party reporting from payers such as Citibank will automatically cause them to pull your return.
If changes are made later that nullify the Citibank position, you'll be able to recoup the tax cost then. But at least you won't have to deal with IRS questions in the meantime.
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