JATR4

Threshold for 1099-INT is $10 (interest). Threshold for 1099-MISC is $600 (prizes or awards).

ss

If the miles were awarded for activity in an interest-bearing account, you get a 1099-INT (subject to a $10 minimum which includes any actual interest). If it's a non-interest-bearing account you get a 1099-MISC (with its $600 minimum).

As a general matter (not specific to FF miles), bonuses for interest-bearing accounts are required by federal regulations to be reported as interest.

dhuey

Forgive me if you've already weighed in on this, but doesn't it seem like the BankDirect Mileage Checking account is generating taxable interest in the form of miles? Several here have posted that they are not getting 1099-INTs for the value of the miles.

bosboy73

Have Brokerage houses such as Fidelity and TD Ameritrade begun the practice of sending out 1099s for the miles they are awarding to open accounts? This would be disturbing indeed!

Counsellor

Not that I know of, but I haven't received my 1099s yet this year. They didn't in the past.

dhuey

I certainly have not received 1099s for any of the several brokerage mileage bonuses I've received over the years, and I would be very surprised if that happens for this year.

BTW, Counsellor, any thoughts on the BankDirect Mileage Checking monthly mileage distributions? I believe some have reported that they do not receive 1099-INTs on the miles received (just the cash interest paid), and I cannot understand that. Most of my positions on miles and taxes have favored the taxpayer, but here it looks to me that the IRS would have a very strong argument that the value of these miles is taxable interest.

hamburglar

Just received a 1099MISC with box 3 for $1000 for 40k miles from Citibank.

Andy2

I agree. I would like to think that my letters and phone calls arguing that the miles should be valued at $0 were important, but they may have meant nothing. I think there is something that we can all agree upon. Bank Direct clearly values the miles at $0 since they pay miles in lieu of interest and would have to issue 1099-INTs for amounts over $10. Many brokerage firms like Fidelity and TD Ameritrade pay 50,000 miles or more for opening accounts and they must be valuing miles between $0.00 and $0.01 a mile since they are not issuing 1099-MISCs (the threshold for reporting on 1099-MISC is $600) and other banks such as Chase and Bank United must be using this valuation range since there are no reports of them issuing 1099-MISCs for miles issued upon account opening. I find Citi to be arrogant in being the only bank to use such a high valuation and not paying any attention to how their competitors are doing things.

Andy2

I think the legal reason is that credit card companies look upon account opening bonuses for personal credit cards as being nontaxable under the rebate rule. If you get a credit card with a 2% cash back feature and purchase $100,000 of personal goods and services that you don't deduct on a tax return, the law makes it clear that the $2,000 of cash rebate is not taxable. It is the same principle that says you don't have $5 of taxable income when you buy a kitchen appliance on sale for $95 that originally cost $100. The credit card companies have always treated account opening bonuses as upfront rebates on personal credit cards and have not issued 1099s. Hopefully this will always continue. Unfortunately the rebate rule doesn't apply to the opening of bank accounts since there is no purchase of personal goods or services.

dhuey

It's not simply a matter of what value to place on the miles -- in fact, that's usually not the biggest issue. The most important question for tax purposes is whether the issuance of miles is taxable income. I think that bonuses for opening accounts (be they credit card, checking or savings) are not taxable income -- they are a rebate. Still, I think the monthly mileage payments BankDirect makes on its mileage accounts are taxable interest.

ss

Federal regulations require banks to treat bonuses (above certain de minimus amounts) as taxable income, valued at the "fair market value". The regulations are silent on the question of how to determine the fair market value of frequent flier miles, which is what creates room for ambiguity.

Citi is unusual in reporting frequent flier miles as taxable income.

An ABA (American Bankers Association) publication from 11/05 may shed some light on why other banks don't. It says:
The ABA has no regulatory authority. This is just their interpretation of the relevant laws and regulations.

dhuey

Wow, my head hurts after reading the two tax code sections cited. I am still unclear on how an account opening bonus falls under the definition of "interest". Perhaps if you are required to keep the money in a particular investment for a set duration, the applicable bonus would be interest. But in the case of a brokerage, they let you do pretty much anything with the money, as long as it's in the account. That might explain why a bank feels the need to issue a 1099-INT in the case of a checking account bonus, while a brokerage account bonus gets around that definition of interest.

Clearly, this is complicated.

ss

You can find part of the answer in Regulation Q (Code of Federal Regulations 12cfr217.101) here.

Yeah.

Andy2

The problem with trying to apply the rebate rule to the opening of the bank account is the lack of nontaxable purchases to apply the rebate. Almost all of the credit card bonus offers require that the user make a purchase to receive the miles. Any value of the miles reduces the basis of the purchased items. If I get 50,000 miles (that some ridiculous person at Citi says is worth $1,250) and I purchase $5,000 worth of goods with my credit card, I get a basis of $3,750 in my purchased goods. There should be no tax consequence to that unless I take a tax deduction for the $5,000 of purchases, just like there was no tax consequence when I buy an item that is on sale for $95 that regularly costs $100.

I don't see how the rebate rule can be applied to a bank account opening. If I get those 50,000 miles for depositing $100,000, I can't very well argue that I reduce my basis in the cash deposit by the $1,250, since I can eventually withdraw my $100,000. If you can see an argument, please let everyone know. That is why the argument I see as best is that the miles have no value, just like Bank Direct says - or have such a small value that no 1099 is required to be issued.

fromfall98

Hello fellow FTers,

Just wanted to give a heads up to you all in case you received any miles from Citibank: Be on a lookout for 1099!! Last year, I opened up a Citibank checking account and received 25K AAdvantage miles. To my surprise, Citi sent me a 1099 for $625 which it reported to IRS! Why do they report miles? And more importantly, who values 25K AAdvantage miles at $625? ? ? ?

Anyways, do look for it in your mail and make sure you include it in your return, as omission could be costly.

Cheers!