Originally Posted by
Andy2
But Happy, this fight should be between each of us and the IRS, if audited. This risk has always been there.
By issuing a 1099, Citi fires the first shot in a war that they shouldn't even be involved with. Citi gets a deduction for what it paid for the miles, regardless of what it puts on the 1099 (and even if it doesn't issue a 1099 at all).
Now the IRS is informed of what Citi thinks the miles are worth, and there is a rebutable presumption that the amount on the 1099 is right. The IRS computer cross-matches to see if the amounts on the 1099s are reported. If a different amount is reported by the taxpayer, a manual set of eyes looks at it at the IRS. Sure, if a schedule is attached that explains or reconciles the difference the IRS might not pursue the issue (but no one knows for sure and the treatment may be different for each of us).
Citi could have followed the precedent of every other financial institution and not issue 1099s, since the value of miles is subjective and they receive no benefit from issuing the 1099s. But they broke ranks, used a ridiculous value, and forced their own customers to make a manual adjustment on tax returns to get to the result that most of us genuinely believe to be correct (a value far less than 2.5 or 2.75 cents per mile). And they put their competitors like Bank Direct in an awkward position.
Can't you see why many of us are angry?
Of course, you should be angry.
My post has nothing to do with the 1099 Citi issued. It is to answer Mountain Trader's post about with the tax factored in, it would be of no value to him for obtaining AA miles through such mechanism. That is the where me and Mountain Trader are "guilty" of deviating to the OT path.
My point is, if one use AA miles in certain ways, then after paying the taxes, the AA miles still brings value to the table versus what Mountain Trader's situation and his reasons about why it is so, including the reasons why he deeply discounts the miles utilization value.
Sorry about the OT. Again it has nothing to do with the legitimacy of 1099. I simply accept it as a fact and based on that premise to analyze whether AA miles with such cost can still worth it or not. To me, it might be worth it if the net cost is at 0.015 or below cost. That means if one is in the 50% bracket (incl the stat tax), this would mean 2 x 0.015 = 0.03 value. Citi gives a 0.025 value. Therefore, it is a cost one does not like, but it is a cost that may be acceptable depends on one's situation.
It really has nothing to do with the 1099. It is a plain Profit / Loss analysis.