Xyzzy

FYI -- it seems there is at least one lawsuit associated with this. I just ran across it. Lk here for details.

Andy2

I don't know if my analysis made sense to anyone, but there is a big danger for many of us to assigning a large FMV to the miles received from credit card bonuses and credit card spending. The five accountants that said it was nontaxable under the rebate rule might be correct but it could result in a big problem. If you received 100,000 miles that you "sold" for $2,500 by booking flights for others, you could assign a basis of $2,500 to those miles by arguing that the miles are worth 2.5 cents each. You would have to reduce the basis of the property you purchased with the card by $2,500.

That may be of no consequence if all of the purchases are of a personal nature, but if you are like me I purchase a lot of reimbursable business expenses and keep the miles from those purchases. If year after year, I reduce the basis of my purchases by the value of the miles I earned, I theoretically pick up taxable income when I am reimbursed $1 for a charge that I have $0.975 of basis. That adds up over time. I think there are more Flyertalkers that make large reimbursed business expenses on their personal cards (and keep the miles) than there are Flyertalkers who sell miles to brokers.

For me, I am better off arguing for a very low FMV (and basis) in the miles I receive. That way I don't have to pick up much income on the portion of the purchases that I turn in on my business expense report.

If I sell those miles, instead of using them for personal travel, I can pay tax on the excess of cash received over basis. In your situation, you did seem to have some donative intent, since the transfers were to and from family members so maybe it wasn't a sale. The gifting argument sure isn't perfect, but no completely far-fetched.

EsquireFlyer

I agree. And if the IRS challenges a return position, I think demonstrating how a questionable valuation position you took can both help you and hurt you in different circumstances can help to persuade IRS Appeals and/or a court that your approach was fair and balanced (like Fox News ) and should be allowed. On the other hand, I suspect that a questionable return position that always helps you and hurts the government is less likely to survive government scrutiny.

(Note that the above is only about questionable return positions. There are things you can do, such as claiming the Standard Deduction when it exceeds your Itemized Deductions, which definitely help you and hurt the government, but which are not "questionable" positions because they are specifically authorized by law. Similarly, IRAs and 401(k)s are effectively government-approved tax evasion plans. )

EsquireFlyer

I agree if the transfers were all to and from family members. But the original post said "friends and family" in quote, so if some of the "friends" are actually strangers found via a mileage broker, then I think the argument becomes pretty far-fetched.

aubreyfromwheaton

Anyone catch Clyde nderson on CNN spouting off about miles and taxes today.

No mention of rebate rule just trying to scare people into watching vhis segment.

Counsellor

I realize that was meant in jest, but language is important.

If I remember what my tax law professor said many decades ago,

"Tax evasion" is when you don't pay tax you legally should pay;
"Tax avoidance" is when you legally arrange your affairs in such a way as not to attract a tax liability; and
"Tax deferral" is when you legally arrange to postpone paying a tax.

Under those definitions, (non-Roth) IRAs and 401(k)s are simply tax deferral, since you pay the taxes when you withdraw the money from the IRA/401(k). You don't "avoid" the tax (even after you die, the IRS comes to get it if it hasn't been paid), and you certainly don't "evade" the tax.

Roth IRAs are none of the above on the principal you put into the IRA/401(k) since that comes from after-tax earnings (you pay taxes on it before you put it into the IRA/401(k)); tax on the earnings on the principal is "avoided" if you meet the age and holding requirements.

EsquireFlyer

But the idea behind a non-Roth 401(k) or IRA you pay less tax by deferring the tax, which is why it would be "tax evasion" if it wasn't government approved.

The point of deferring tax on your IRA/401(k) investments is to pay the tax when you are in a lower tax bracket (which most people are in retirement, compared to while they are working), and thus save on overall tax liability.

Whereas with a normal brokerage account, if you tried not reporting the wage income that you earned and put into the brokerage account, and not reporting the profits that accrued in the brokerage account, and waited until your retirement age to report (in a lower tax bracket) all of the income as you withdrew the cash from the account, that would be tax evasion. Because even though you're paying tax, you're paying less than you were supposed to pay. Which is why I said that IRAs/401(k)s are like government-approved tax evasion plans.

Counsellor

That is certainly one way in which an IRA/401(k) can benefit the individual, but it applies only if the individual is indeed in a lower tax bracket upon retirement, and I'm not sure you can say that's true for "most" people.

I believe the more universal benefit is that it allows the corpus to grow without taxes being taken out reducing the corpus. In other words, you enjoy earnings on what would otherwise have been removed from the corpus to pay taxes.

My main point, however was that "government-approved tax evasion" is technically an oxymoron. If one is going to use the concept, it would probably be more applicable to the earnings on the corpus in a Roth IRA, since tax on those earnings is never paid, while the tax on IRA/401(k)s is simply deferred.

All of this is off-topic, though.

freezone

Saw this post on another thread :
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Planning on cancelling my Cap 1 Venture card this week as the yearly annual fee is due. I still about 75k miles in the account and will lose them when card cancels. Plan to transfer all my miles to my wife's Venture card acct (she still have her full 110k miles unused). She plans to pay the annual fee if they don't waive it for her.

Question: if I transfer over 75k miles to my wife, will this be taxable= meaning will Cap 1 sent me a 1099 to be paid as taxable income at 1cent a mile?
Reason I'm posting about the Venture miles is that I heard Cap 1 sends out 1099 for points transfer from their No Hassle Rewards program.

Any experiences with this?

Thanks
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Since I'm in the situation as the original poster, wonder if anyone have a answer to this.

Andy2

[QUOTE=freezone;18091416]Saw this post on another thread :
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Planning on cancelling my Cap 1 Venture card this week as the yearly annual fee is due. I still about 75k miles in the account and will lose them when card cancels. Plan to transfer all my miles to my wife's Venture card acct (she still have her full 110k miles unused). She plans to pay the annual fee if they don't waive it for her.

Question: if I transfer over 75k miles to my wife, will this be taxable= meaning will Cap 1 sent me a 1099 to be paid as taxable income at 1cent a mile?
Reason I'm posting about the Venture miles is that I heard Cap 1 sends out 1099 for points transfer from their No Hassle Rewards program.

Any experiences with this?

------------------------------------------------------------------------------------------------------------------------------
For some reason my response is italicized (sp?). I don't know why that happened. The text below is mine.

I will throw out my thoughts and see if others agree or disagree.

There shouldn't be any 1099 for this transfer. The Capital One credit card awarded bonus miles for signing up for the card (even if it was a matching program), and satisfying the minimum spending requirements. The rebate rule allows the recipient to receive the points without incurring taxable income and that same recipient will be able to transfer the points to a family member without incurring taxable income. There is also no taxable income when the points are redeemed for travel or reimbursement.

The rebate rule makes the receipient reduce the basis of the goods and services purchased with the credit card by the fair market value of the points he or she received. There is usually no tax consequence to a reduction in the basis of purchases. If you will read up a few posts, you will see how there can be tax consequences if some of those purchases were deducted on a tax return or a reimbursement was received from an employer for the purchases.

Capital One's No Hassle Reward Points appear to be like Citi's Thank You program in that award points are provided for credit card transactions as well as banking transactions. Presumably all of the 1099s in both Citi's and Capital One's situation involve only the banking side. The rebate rule doesn't apply to points received from banking transactions.
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freezone

I will throw out my thoughts and see if others agree or disagree.

There shouldn't be any 1099 for this transfer. The Capital One credit card awarded bonus miles for signing up for the card (even if it was a matching program), and satisfying the minimum spending requirements. The rebate rule allows the recipient to receive the points without incurring taxable income and that same recipient will be able to transfer the points to a family member without incurring taxable income. There is also no taxable income when the points are redeemed for travel or reimbursement.

The rebate rule makes the receipient reduce the basis of the goods and services by the fair market value of the points he or she received. There is usually no tax consequence to a reduction in the basis of purchases. If you will read up a few posts, you will see how there can be tax consequences if some of those purchases were deducted on a tax return or a reimbursement was received from an employer for the purchases.

Capital One's No Hassle Reward Points appear to be like Citi's Thank You program in that award points are provided for credit card transactions as well as banking transactions. Presumably all of the 1099s in both Citi's and Capital One's situation involve only the banking side. The rebate rule doesn't apply to points received from banking transactions.
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Thanks for the reply as it seems to make sense.
I've had experiences with Citibank as I've dealt with their Citi AA credit cards for AA bonus miles and with their Citi checking accts that offer AA miles.

Never had 1099 sent to me for receiving or redeeming AA miles for the CC bonus but have received 1099 when they gave me 20,000 AA miles when I had opened a checking acct with them.

If all holds true and same with Cap-1 then I will be safe, otherwise I will be hit with a $780 tax bill at year end. (Fingers crossed)

MilesTalk

So my latest with Citibank is that since my points all go into one TY account, they (claim) they can't separate out and so they just treat it all as taxable. The investigation into how it was broken out resulted in a 2 week delay to get a letter simply regurgitating my tax liability. I called again and again explained how if 10% of the points (roughly) come from banking, then my 1099 should be for about $71 (or nothing since it's under $600) and not $714. She claims she'll have a supervisor look into it and call me back within 2 days.

If I wind up paying taxes on this, I think I will send them a bill asking for reimbursement of the tax liability they gave me (that I didn't actually have) and put it on my blog.

EsquireFlyer

That's insane.

nsx

If you expect to be in a higher bracket, the Roth works better. If you expect to have the same tax rate now and later, then it's a tie between Roth and traditional IRA. EXCEPT: the Roth lets you shelter more money. Even though the contribution limits are the same for Roth and traditional, with the traditional IRA your contribution is in effect reduced by the tax rate.

A $3500 Roth contribution can be equivalent to a $5000 traditional IRA contribution, and they both would cost you about $5000 pretax. If you are up against the dollar limit on contributions, the Roth IRA can be better for this reason alone.

Andy2

You have probably already done this, but I think a google search will reveal that Citi made this same mistake several years ago and eventually issued corrected 1099-MISCs when they admitted that only the "banking" portion was subject to tax. The difficulty, of course, is what formula to use to determine what portion of the redeemed Thank You points are attributable to banking rather than to the credit card portion.