BobH

You're assuming they look at it and they may not!

Hopefully, this Citibank thing will never create an flag for an audit.

Bob H

BF263533

This is a fair analysis.

Citi needs to fire quite a few people. American needs to re-evaluate their affiliation with Citi.

Did Citi make adequate disclosure on the account application?

Letting banks like Citi survive was a real big mistake. That place is run by people lacking practical and common sense.

Is there a link on the American board alerting AA's FFs ?

SirGareth

American Airlines is under the jurisdiction of the bankruptcy court; Citibank should be so there might be bond there.

smedleyb

This section of Sen. Brown's letter to the Vikster made me wince:

Furthermore, the IRS stated that it “will not assert
that any taxpayer has understated his federal tax
liability by reason of the receipt or personal use of
frequent-flier miles or other in-kind promotional benefits
attributable to the taxpayer’s business or official travel.”

It's that last part, "attributable to the taxpayer's business or official travel," that has me worried. The 2002 law/precedent governing the taxation of miles which Sen. Brown invokes concerns miles accumulated in the course of doing "business." Firing off CC apps from my den hardly constitutes business.

The IRS's non-response to this issue clarifies nothing, either, and just stokes the rampant anxiety. Besides, when has the IRS ever turned away free money?

CherylD

Called IRS today following advice regarding asking for a form 4598 or letter to Citibank disputing value of miles reported. Rep put me on hold for two long periods of time while she researched. Finally said, that they would not do anything. Referred me to 1099 instructions and to Publication 17. Said, if I disagreed with the value, I would have to attach a statement to my return and that then the IRS might review return. Sounds like she was telling me I would open myself up for an audit.

dhuey

Challenging the FMV of 2.5 cents per mile might indeed lead to an audit, but keep in mind that the IRS often communicates with taxpayers, disputes FMV, disallows deductions, etc., in ways far less intrusive than a full audit. It could be, for example, that they refuse to accept a lower FMV and leave it to you to fight it in court -- but all of that could happen without an audit.

iqbalt80

Really confused about the new 1099 rules.

A question here: If i buy few thousands in Gift Cards from the UR or from a bank, will I get a 1099?

Thanks.

Andy2

No, this should be protected under the rebate rule. If you buy a $25,000 gift certificate for Chiles restaurant and get "rewards" that have a "theoretical" FMV of $625, you have a real cost of $24,375 in the food you eat, rather than $625 of income. Banks (primarily credit card issuers) are allowed to utilize this "rebate" rule and not issue a Form 1099, since the recipient is getting a rebate instead of income.

The opening of a bank account is a little different. The tax rules want to look at the rewards that are received as disguised investment income instead of the receipt of a nontaxable rebate. The problem is that some arguments can be made that even the Citi account-opening situation has some similarities to a rebate and some similarities to investment income.

Just because an item is a rebate that avoids 1099 reporting for the payor, there is still some uncertainty as to whether the recipient might have taxable income to self-report. Remember back a long time ago (beyond the tax statute of limitations) a lot of us bought Charter One Gift Cards in quantities of $200,000 or so over a period of time - the deal has expired so don't get excited. If we bought $200,000 of goods with them, the rebate rule would say that we have no taxable income, we just reduce the basis of the stuff we bought by the value of the rebates. No 1099 was required.

But most of us cashed those gift cards in and deposited $200,000 minus the tiny fees for converting them to cash. Does that person have taxable income if the "value" of the awards is $5,000 like Citi would say (at 2.5 cents per mile). Can a person argue that the basis of the cash is reduced - which doesn't make a lot of sense?

The main argument that is made for no taxable income in this situation is that the rewards, such as frequent flier miles, have a value of $0.00 per mile. So the reward benefits from cashing in the Charter One gift cards were nontaxable as a result of having no value.

Oh, and the 1099 rules are not new. The rules have been the same for decades. Citi is just doing it differently than Bank Direct, Fidelity, TD Ameritrade and Chase do it. No change in the law, just a change by Citi, primarily as a result of theor position that miles are worth 2.5 cents.

normthe

If this has been posted before I apologize. I did not see it on this tread yet.




Are Credit Card Sign Up Bonuses Taxable?
Thursday, February 2nd, 2012

Are Credit Card Bonuses Taxable?As reported by the LA Times, Citibank stirred up some controversy this week by mailing out 1099 tax forms to customers who received miles as a reward for opening a new checking or savings account. As a result, many consumers were stuck with an unexpected tax bill. To add insult to injury, Citibank chose to value those miles at a hefty 2.5 cents apiece, making a bad situation even worse.

Why is Citibank doing this?
Why send out the 1099s? Why value the miles at 2.5 cents each? Surely, Citibank’s cost to purchase the miles was significantly less than that. And while it is possible to get 2.5 cents of value or more out of a mile, most experts would agree that it is an aggressive valuation.

Somewhat ironically, the difficulty in placing a value on miles is the primary reason that the IRS has historically not taxed them, as I noted in this prior post on the subject. (It also explains why you should always favor a business credit card that awards point/miles rather than a cash rebate.)

What about miles earned from credit card bonuses?
Fortunately, Citi seems to be the only bank doing this at the moment and has limited this practice to bonuses awarded for checking and savings accounts. This practice has not extended yet to credit card bonus offers. The distinction, as clarified by the IRS, apparently is this–credit card sign up bonuses are almost always tied to a purchase requirement, and thus can be considered similar to a rebate:

in those cases, miles [received for using a credit card] wouldn’t be taxable because they’re more like a rebate.

“A common analogy… 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.”

In contrast, awards associated with opening an account are similar to a gift or award: “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.

The bottom line?
Strange as it may seem, the annoying initial spending requirement that accompanies many credit cards is apparently the primary impediment that keeps sign up bonuses from getting taxed.

nsx

A tax law expert speaks:
Too bad he can't answer that last question. My wild guess is that a typical IRS agent would accept 1 cent per mile, or less than that if you can demonstrate that you got less value from your miles based on available fares for the flights you booked.

Andy2

I was a little disappointed that he doesn't try to tackle the hard questions like fair market value and doesn't distinguish the 2002 IRS announcement from the facts at hand. Personal miles earned from employer-paid business travel are not eligible for exemption from income under the rebate rule either, but the IRS announced it won't challenge a valuation of $0.00 per mile. Why doesn't that logic apply here? Is it because these miles for opening a bank account are a substitute for interest income? It doesn't seem like it, since Form 1099-INT wasn't the one that was filed and the amount of miles awarded doesn't vary with the level of deposit. Is it because the amount of miles awarded in the example in the IRS announcement is very small and the amount of miles awarded by Citi is larger? It wouldn't seem so. since I can't go too much farther with 23,500 miles than with 500 miles.

And as I noted in an earlier post, we buy plenty of things when we open a bank account. Citi only awarded these miles when the user tried a lot of banking products like direct deposit and bill pay, hence the 1099-MISC rather than the 1099-INT. Most of us end up paying a lot of fees to our primary bank, like debit card fees and service fees. Why is my "award" automatically thought of as "investment income" rather than a rebate against the many nondeductible fees I will eventually pay that bank? A bit of a stretch, but not completey nuts in my opinion.

dhuey

Thanks. Too bad also that he didn't question the "prize or award" idea. The Citi checking account miles are an interest payment, not a prize or award. That distinction isn't so important WRT Citi, but it might be in other areas.

mister_blonde

This subject was just discussed in a Journal article that I saw pop up in the last couple of hours:

Frequent-Flier Tax Traps
http://online.wsj.com/article/SB1000...DDLE_Video_Top

Andy2

How could someone write an article on this subject and not bring up the concept of the fair market value of a mile? The article just focuses on whether or not the mile is taxable. Big difference between a mile being taxable at 2.5 cents per mile and 0.00001 cents per mile.

Carolinian

I decided that sometime ago Citi was a crappy bank to deal with for other reasons, so I don't. If I did, this stunt with 1099's would be enough for me to cut up their stinking cards and send them back, and close all accounts I had with them.