Andy2

Miles for opening and maintaining a bank account are different from several of the activities you describe. The so called "Rebate Rule" says that miles obtained as a reward for personal purchases do not constitute taxable income because there is no accession to wealth. If someone obtains a personal credit card and receives a 25,000 mile bonus for using the card and receives an additional 10,432 miles for purchasing personal items with it, no taxable income occurs. Without this rule, life could not continue to function in a world of varying prices. Every time you purchased something on sale for $9.95 that usually costs $15.00, you would have to include the difference in your taxable income. The government decided that cash back rewards and frequent flier miles on personal credit cards, rental cars, and hotel stays were so similar to "sales" or "discounts" that they should fall under the "Rebate Rule".

The opening and maintaining of a bank account probably doesn't fall under the Rebate Rule. We aren't buying cash when we open an account. The only time we buy cash in the financial world is when we get coins shipped to us, but I digress.

So it seems that a bonus for opening and maintaining a bank account is more akin to interest, and would require a bank to issue a Form 1099-INT for payments more that $10. But it gets more interesting from here.

Banks only issue 1099-INTs for accounts that pay interest and include disclosures regarding the interest rate. Most of the checking accounts and brokerage accounts we open do not have these disclosures, so banks and brokerages have long tried to figure out how to avoid fooling with 1099-INTs in this situation. An interpretation of the Form 1099 rules holds that if a customer receives a bonus for opening an account that includes the receipt of a product (like a check card) or requires the customer to perform services (like using bill pay), it is valid for the bank to issue a 1099-MISC instead of a 1099-INT for the account opening bonus. A Form 1099-MISC only needs to be issued for bonuses over $600. It takes a lot of miles to equal or exceed $600.

Did the poster that said he received a 1099 from Citi for 40,000 miles receive a Form 1099-MISC? Apparently, with respect to the savings account, Citi couldn't figure out how to fall into the 1099-INT rather than the 1099-MISC requirements.

While I agree with Happy's analysis, I strongly disagree with his opinion regarding the value of miles. Which brings us to Bank Direct, which provides sufficient miles to be required to issue either 1099-INTs or 1099-MISCs to lots of customers if the miles have value. Bank Direct doesn't do so. Using 2.5 cents per mile would bring many other issuers of miles for opening accounts above the $600 threshhold even for 1099-MISCs.

Personally, I believe that miles issued in increments of less than 25,000 at a time have no value. Bank Direct must take this position, and I believe it is correct. A recipient simply cannot do anything of value with a small amount of miles and the miles may expire unused. If a person receives a one time award of 25,000 - 50,000 miles, it would logically have some minimal value since a ticket could be booked, but the value would seem quite small due to the lack of availability of flights using the lowest mileage threshhold. That is just my opinion. I don't know what the value is, I just know it is not 2.5 cents per mile.

FlyingBoat

This valuation is Absurd!

Why don't they use what American Allows you to redeem them for on American's website for AA Vacations!

This valuation is just a little over 1 cent per mile, as I recall. You can get a hotel for a sliding scale of points or miles. It is only 1.1 cent per mile and the price of the hotel is somewhat inflated from what you could get on a pure money basis as well, so it comes out to less than 1 cent per mile.

People buy miles to top off what they already have. This is an unrealistic valuation. I will sell Cit all the miles I have for 2.5c per mile!

uszkanni

In the two promos I received (one for checking, one for savings) the only mention of taxes was the single sentence (in VERY FINE PRINT) that "Customer is responsible for all taxes." There was no mention of ARV or anything about how the miles would be valued. Perhaps the disclosure statement for this promo is different?

Too true. And, in my case, I relied on what I thought was common banking practice regardng FF miles. My mistake but, hopefully, I've managed to eliminate the problem by closing my savings account and thereby not getting the additional 20K miles. Citi reps have told me (lol) that they do not issue a 1099-MISC if the total award value is less than $600. The 20K miles I will get from my checking account will be valued at $500 and, so I am told, no 1099-MISC.

Yep.

uszkanni

I have to disagree with you on these points. As I understand it, Bank Direct's model is to provide miles to people on a monthly basis and in direct proportion to their account balances. Not that my opinion holds sway with anyone but I think this is clearly a form of interest; just miles instead of cash. BD may not be issuing 1099-INTs and maybe they're on firm ground in not doing so (and maybe not), but I think these awards are clearly interest payments in miles rather than cash.

I also disagree that miles awarded in less than 25,000 increments have no value. First of all, a 1099 reports income on a yearly basis. It makes no difference if you get 100,000 miles all at once or over a 4 month period. It's the aggregate amount that matters. Secondly, even 25,000 miles can have great value. For AA, that's the difference between a business class and first class ticket from NA to Asia/Europe. The fact that flight awards are hard to come by may affect your valuation of the miles but not someone else's. But it's not your or my valuation that matters; it's the value assigned to the miles by some independent "authority" (whether it's an open, freely traded market or the "MSRP"/ARV as determined by AA or Citi). Also, the fact that they might go unused is not the IRS' problem. If you or I choose to let our miles expire that's a decision we make, based on whatever factors are important to us. Just like if we decided to burn $100 bills because they cluttered up our wallets.

Of couse businesses play by different rules, but let's not go there.

Happy

Instead of digging up the IRS reg on this as it does not help anyone in practicality. the article dated Jan 23 on this blog may help you to understand the issue which is not new at all. It also provides some tips on how to dispute it.

http://boardingarea.com/blogs/viewfromthewing/page/2/

How to Dispute the Value of Miles or Prizes Reported as Taxable to the IRS

ExitRowAisle

I'm quite familiar with the issue. I was just subtly pointing out that contrary to your statement there is no official rule on the matter. If there was, Fidelity, TD Ameritrade, Chase, BankDirect, etc. would be doing the same thing as Citibank. Are you suggesting that all of those companies' accountants and legal counsel don't know how to comply with the tax code?

I feel sorry for the people who are getting sucked into this mess. I've dealt with many of these companies in the past and have never received a 1099 for bonus miles.

Surface Interval

Good write-up.

One thing I did not notice there, or anywhere else for that matter; is that fact that one of the current Citi checking promotions is offering 25k miles OR $125. This could help one argue for a lower value for the miles received.

Best of luck for all that got hit with a 1099 in trying to get it reduced. Please post your results, both good and bad.

Andy2

I don't disagree with anything you said. However, it is clear that Bank Direct values the miles at $0.00. A lot of institutions that take the position that a 1099-MISC, rather than a 1099-INT, is applicable issue few enough miles per recipient to take a reasonable position that no 1099-MISC is required. Not so with Bank Direct. They issue an incredible number of miles to those with large balances and the value of those miles would exceed $600 even if the value of the miles were just barely above $0.001 per mile.

Every single one of us would value the miles differently. The value might be a little more than $0.00 (like $0.000001 instead) per mile, but it sure isn't 2.5 cents per mile.

A lot of the trips I have taken with miles would simply have not occurred if I hadn't had the miles. I spent cash on those trips that I otherwise would have invested. Did the miles have a negative value? I am worth less now because I received the miles.

I recently stayed at several Hiltons and Westins on a trip using miles. If I hadn't had points, I would have stayed at Motel 6 or Red Roof. Do I value the points based on the room cost of Motel 6?

rtom

Bottom line for me: I just received a check from Citi for the balance of the account I canceled last week.

No more Citi for me!

jclay1212

I wonder what the means for the 30K promo. Maybe I should hold off

gunpig

Do you have a link for this promo...I'm going to use it as the basis for my argument of valuation! Thanks

ZeppoX

See this thread for another idea about valuing miles for tax purposes. The value described is 4/100 of a cent per. Will it work? Don't ask me, but that such evaluation is used by one of the airline's business partners is a fact.

Andy2

We have several threads discussing this Citi 1099 issue, which is unfortunate.

I mention this because, ironically, a post in another thread references a discussion with a Citi rep. who mentioned points.com as a reference for the $0.025 per mile rate.

This of course was the "retail" side of points.com. The customers like us are subject to the $0.0004 "wholesale" price. I could live with a value of 0.04 cents per mile, if I did the decimals right.

Jim055

My point in starting this thread was simply this:

Citi issues 1099s for miles. This is a major development that every FTer needs to be aware of. When you deal with Citi banking products, not only do you have to fulfill the promotion's requirements, you also have to pay taxes on those miles valued at 2.5 cents each.

Surface Interval

For the 25K offer:
https://online.citibank.com/JRSAO/ao...PromoCode=C25A

For the $125 offer:
https://online.citibank.com/JRSAO/ao...PromoCode=C25E