SylviaCaras

"Redemption of ThankYou Points received for Products and Services may result in your receipt of taxable income from Citibank in the tax year in which the ThankYou Points are redeemed.
...
"In accordance with U.S. tax law, Citibank may be required to send to you and file with the IRS a Form 1099-MISC (Miscellaneous Income) for the year in which a reward is issued to you. "

This reminds me of buying a stock - certificate issued (or transaction posted) with a purchase value, no taxation impact while held. And IRS is now aware of both sides of the transaction, brokers sending basis too on statements.

Citi is using a 1099-MISC to state 'purchase price', value. And then another at redemption.

At least those two should net out. Or there should be no taxation until redemption? I'm watching my mail; This is amazing shenanigans!

Sylvia

Andy2

What I get from the wording of the Thank You points terms and conditions is that the 1099-MISC is issued in the year the Thank You points are redeemed and no 1099-MISC is issued just for the issuance of Thank You points. I have since read in the link that Daveland posted that Citi, in the past, used a averaging formula to determine the portion of Thank You points earned through banking and limited the taxable income on the 1099-MISC to those "banking" points. But this year Daveland indicated that this formula should not have caused the income to exceed $600. It will be interesting if he reports back regarding the details once he receives the 1099.

Citi issues the 1099-MISC for AA miles in the year the AA miles are issued rather than in the year the AA miles are redeemed. I suppose Citi has a valid point in that it doesn't know when the AA miles will be redeemed, if ever. But it is clearly inconsistent.

If Citi believes that AA miles have value in the year of issuance, why isn't the same true for Thank You points? If their argument is that the Thank You points would seem to have a value of 1 cent per point in the year of issuance, but the better determination can be made in the year of redemption since Citi might have de-valued their worth to 0.5 cents by then, why isn't the same principle true for AA miles? If Citi values 25,000 AA miles at $625 in the year of issuance but I ultimately redeem those miles for a flight costing $250 three years later, I seem to be out of luck from a tax standpoint if I paid tax on the $625 in the year the 1099-MISC was issued.

I am just saying their 1099 policy for Thank You points is fundamentally different that their policy for AA miles, and one conclusion that might be reached is that Citi values the Thank You points at $0.00 in the year of issuance (if those Thank You points are not redeemed that same year), but places a higher value on those Thank You points in the year of redemption.

dhuey

Lots of things with substantial fair market value cannot be converted to cash in the year of receipt -- restricted stock being a very common example.

Andy2

Yes, but if you were valuing it in the year of receipt, wouldn't you place a discount on it?

If a bank were making a loan using the restricted stock as the only collateral, the bank wouldn't want to loan very much. Even if they felt good about the future value of the stock, they can't be sure the employee holding the restricted stock might not walk off the job - and staying on the job for a specified period of time is usually a requirement for the restrictions to be lifted.

If I have 25,000 miles that I might use to book a flight five years from now that would have otherwise cost $625, what is the value of the 25,000 miles this year, given that a lot of things might happen in the next five years to keep me from taking that flight, including doubt as to whether AA will still be around. I would have to discount that $625 a lot, probably down to $0 - $125 (in my opinion). Note that I merely used $625 to match up to Citi's valuation of 2.5 cents per mile. In all likelihood if the retail cost of the flight was $625, no 25,000 mile saver seats would have been available, so the discounting starts from the lower amount.

Citi seems to do exactly this when it issues Thank You points for banking products. No 1099-MISC when Thank You points are issued, but a more precise calculation (generally in a year subsequent to issuance) when those Thank You points are redeeemed. If Citi says AA miles must be valued for tax purposes in the year of issuance, I think a very hefty discount applies. Like everything related to FMV, that discount would differ from person to person based on that individual's facts and circumstances.

MJLouise

Wow. How many TY points did you redeem? I earned the points in 2011, and in 2012 only redeemed about 50K points which might have had about $600 "value" in air fare.

Andy2

Just curious JATR4, do you really think the redemption amount is the value if it isn't convertible to cash, or to true cash equivalents? If I can convert 50,000 points that I earned from opening a bank account into $500 of cash, it sure was worth 1 cent per mile.

But so many of the gift cards are for upmarket establishments. Let's say I convert the 50,000 points into $500 of gift cards at Chiles and it provides me with 50 meals of Mexican food. I like Chiles, but I eat more often at Taco Bell than Chiles. Those 50 meals at Taco Bell would have cost me $275.

So I saved $275 by eating at Chiles (using my gift card) instead of at Taco Bell. But the 1 cent per point valuation says I get $500 of taxable income instead of $275. Did I like the Chiles food $225 better than the Taco Bell food? Citi says so if it values my redemption at 1 cent per mile and says I get taxed not only on the $275 but I also get taxed on the $225. I really struggle with that, so I always want to argue that my taxable income is the true cash value of the 50,000 points, which I really don't think Citi can adequately determine for me, unless they are willing to give me cold cash of a fixed amount.

JATR4

TY points are definitely worth their value to me--whether gift cards or flights. We used them for discounted flights that also get miles since the flights are paid for thru a travel agency. I get gift cards for the remaining points--at places that I frequently use.

Called to cancel the cards and they offered another 10,000 points to my wife and me for not canceling. An easy $200 (20,000 points) and will still cancel the cards before the annual fee. Plan on getting the Citi Forward cards to replace the Premier cards.

I like free money. Only required a $1,000 spend for each of us. Still worth it even if we get 1099s.

dhuey

You might decide the miles are worth $0 based on your own circumstances, but that's not the FMV test. The 25K AA miles are enough for a saver award, and that is worth something substantial. I agree with the substantial discount compared to retail price, but I think you take that way too far.

Andy2

You may be right and I may be right, but that is always the case with FMV. Every applicable court case has two experts on FMV who disagree, and the "correct" answer is ultimately decided by a judge or a group of jurors who are the less knowlegdeable regarding the subject than the two experts, the plaintiff, the defendant, or the lawyers.

An economics professor would tsk tsk at our little thread. The miles were not awarded in large increments in a game of chance entitling the recipient to a potential trip of a lifetime (which might subjectively have a larger value). The modest number of miles awarded by Citi were paid in lieu of interest. We have to value them because they are investment income instead of a rebate from taking flights or receiving/spending on a credit card, and are not earned as a result of taking flights or buying items from a shopping mall.

How would the economist value those miles that are "investment income"? He would look at the cash interest that someone might have earned (using the same level of effort) from a competing FDIC-insured bank that paid only cash interest instead of cash and miles. If Citi, by paying miles, really paid a lot more than their competitors, customers would line up at great distances to join. They didn't.

That is why the customer that was offered $125 by Citi instead of 25,000 miles has a meaningful statistic. Interest rates were low in 2010 and 2011, and I'm not convinced the person who opened a similar account (with no payment of miles) would have earned very much cash interest at all.

The economist would reserve his largest tsk tsk for Citi, itself. Instead of paying the interest in the form of cash, they pay it in the form of an alternative currency such as AA miles or Thank You points, they state that they are the sole and ultimate determiners of value of that alternative currency, and they place a value upon it for tax reporting purposes that very few posters on this thread view as anywhere close to realistic. If Citi purchases its alternative currency such as AA miles for 0.4 cents a mile (a total guess) but wishes to value it at 2.5 cents per mile when issuing 1099s to its customers. Really, Citi? What happened to that magical mile while you held it in your golden hands.

The economist would read the article in the Economist Magaizine in which they argue that frequent flier miles are described as the most overvalued alternative currency in the world. If he holds US Airways, Continental or Delta miles (or Hilton Honors points) he might amuse himself by confirming that absolutely, positively no flights or hotels are available anywhere he might want to go at any reasonable utilization of miles or points. That economist would return to his example of calculating the equivalent, alternative cash interest that might have been used for the miles.

In the unlikely event of an IRS audit, the IRS auditor would need to determine FMV of the mile if he chose to dispute the taxpayer's valuation. The IRS auditor would review the court cases and find the examples of the shrewd businessman who used his frequent flier miles to take business trips and was reimbused in the form of cash for the use of the miles. That guy gets taxed on the cash he received less his basis in the miles. Not much to argue about there, but still no judicial guidance for the example of valuing miles received from opening a bank account, especially when those miles are not used in the same year of issuance and must be valued based on the worth in the year of issuance.

So the taxpayer and the IRS agent are stuck with an unanswerable question of how to value the miles received from Citi for opening a bank account. They may not agree, just like we do not agree. They might share a laugh at the arrogance of Citi, which paid interest in the form of an alternatve currency and started this problem by valuing the alternative currency in the form of U.S. dollars to attempt to comply with a tax system that is based solely on U.S. dollars. They might laugh that all of Citi's competitors that do the exact same thing do not issue 1099s in the exact same situation. They might raise their eyebrows that Citi tries to do the impossible by valuing AA miles in the year of issuance but waits until the year of redemption to value Thank You points (since it is easier to try to arrive at a value in the year of redemption, but still difficult to arrive at true FMV even in the redemption year). But at the end of the day those two people would never agree as to the FMV of a mile.

I just think the members of this board often overvalue a mile, so I think it is useful to take a step back and consider how a disinterested economist might look at it.

Father-of-3

I cashed in Citi Thank-you points for $550 worth of gift cards in December. At the time I didn't consider it the best value but now seeing as I avoided the $600 threshold I feel brilliant.

I'm going to make certain to do the same thing in future years. I'll cap my use of this program at 55,000 points and move to another card/program.

.

josephstern

I just got ANOTHER 1099 from these guys.

I had a $700. My wife had a $650. Now I just got a $974. Not sure how that got calculated.

But now I'm over the edge - I'm going to protest.

dhuey

Far more often on FT you see people properly value miles. We know this stuff better than most airline employees. I have no doubt that if tomorrow AA made a special offer to FTers in which we could buy miles at 1 cent per (a reasonable guess of Citi's cost), scores of FTers would buy bucket loads of miles. I would load up big time at that price.

Like I said above, you are taking a very reasonable approach, but when you start taking about a FMV of $0, you've gone outside the boundaries of reasonableness.

Andy2

I looked back at my records and did some math to see how much AA miles would be worth if the miles were equal in value to the cash interest that I would have received if the funds had been in my high-yield savings account. I think this is a useful way to test FMV of miles and I was surprised at the results.

In 2009 and 2010, I signed up for Citi offers in which I had to deposit $5,000, maintain that balance for fifteen months (in addition to doing two bill pays), and I would receive 20,000 miles paid in installments of 10,000 miles each 6 months and 18 months after opening the account. (Hypertechnically, I was supposed to get the second installment after 15 months but everyone who signed up for the offer had to email Citi to get the second installment, which takes three months to get action, and the $5,00 balance had to be in the account at the time Citi decided to post the second installment).

So I tied up $5,000 for 18 months with no (or almost no) cash interest. During that period of time I could have placed the funds at ING or Everbank and received a little over 1% interest for the eighteen months instead of receiving 20,000 miles. The cash interest would have been around $80, which is the 0.4 cents that I could sell the 20,000 miles back to AA using the technique that SS referenced. It is also very close to the 0.5 cents per mile that the customer would have received if he had chosen Citi's offer of $125 for opening the account instead of receiving 25,000 miles.

I tried to do the math of what the interest rate would have been on the account if the 20,000 miles were worth 2.5 cents each but I was worried that my head might explode since the interest rate was so high, and the American Bankers Association might get mad since they make the bank value the miles at $0.00 when calculating the annual percentage rate on these accounts. If that was really the interest rate for safe money it would have made the national news.

Coincidentally, I looked at award availability on AA for a potential upcoming trip and found that only Standard Awards are available for the two months I was considering. No offense to AA, the same was true for United, Delta and US Airways. Delta required the highest number of miles since they have that "really high" category. Maybe it is for the best. I would need a place to stay and the Hilton room that cost 40,000 points last year will cost 150,000 - 200,000 points per night unless the hotel is selling inexpensive rooms for cash - and it is up to the hotel to be honest about that.

The old rule of thumb that airline miles are worth 1 cent per mile was developed before this standard award concept caused them to so often be worth half of what they used to be (0.5 cents is half of 1 cent). I guess the Economist magazine might have been on to something when it distrusted an alternative currency like frequent flier miles where the value per mile can be devalued by the heavy issuance of miles and limitations on their use. The offers look great on paper, but when the saver seats aren't available it is the old "nickel hamburgers the size of a dime" situation.

No matter what I do I come back to this 0.4 - 0.5 cent per mile figure instead of the 2.5 cents per mile used by Citi. I think a lot of Flyer Talkers, including me before I really considered the numbers, are in denial regarding valuation. Not as heavily in denial as Citi, though.

dhuey

We could go back and forth on what miles are really worth to you, me and others here, but that's a bit like arguing about the intrinsic value of a Warhol painting. What counts for tax purposes is what people generally are willing to pay for miles. That gets complicated when you consider the prohibition against resale, but what consumers and large financial institutions regularly pay for these miles is strong evidence of FMV -- particularly the latter group, in my opinion.

Andy2

Yes, but even that can be elusive. I would imagine that the AA miles are purchased in bulk by the Citi consolidated entity, which includes the credit card corporation. Citi earns a lot of money on the 1% - 3% credit card fee from merchants (I know they don't get all of it due to the complicated workings of Visa/Mastercard), but they are willing to take a greater upfront loss when providing incentives to get customers to obtain and use the card, since they will make it back with future profit.

The best apples to apples comparison for the Citibank account opening bonuses is Bank Direct. Like Citibank they pay miles in the form of interest and loan the money out in order to receive interest themselves. It would be great to know what Bank Direct pays for AA miles in your example, as well as understanding why they don't issue a Form 1099-INT when they pay those miles out (and it definitely appears the correct form would be the INT rather than the MISC for Bank Direct).