Taxable Valuation of Miles Won in Sweepstakes
 

I was the lucky winner of 50,000 AA miles in 2004 through a sweepstakes held by American Airlines Publishing. In the rules of the contest, the valuation of the miles was listed as $1250 (2.5 cents/mile) and I believe the prize is being reported to the IRS.

I've heard that it is possible to claim an alternate valuation of prizes for tax purposes, provided you can prove that valuation. Personally, I value FF miles at 1-1.5 cents/mile.

I don't have a problem paying taxes on the prize... I just think that $1250 is overvalued when, realistically, you could use those miles for two STL-ORD round trips valued at $100 each.

Does anyone have any experience in doing this with airline mileage prizes? Or, alternately, does anyone know any resources I could view to help in this process?

Thanks,
Greg

For the IRS, it doesn't matter how you value something - it's only the market that matters. I believe that in order to show a different valuation, you need to demonstrate "fair market value" by showing how much it should cost to purchase the item on the open market. Since the only legal market I'm aware of for purchasing AA miles is directly from AA, and they charge $625 for 25,000 miles, this is most likely how they arrived at their value.

Congratulations on winning, and good luck mitigating your tax liability.

If income was not recognized when you won the miles, then you have no tax base in them and thus no contribution base. :(

What does that have to do with the question? The OP won them. He didn't donate them.

you may wish to contact AA and find out how they arrived at this tax amount and then dispute it. Also, you should visit a savvy tax person who is not just H&R block style... a bit more out of the box of a thinker... Legal but savvy.

Contest this and instead, offer something more along the lines of what the customer sees it as... Worse case: they ask you to pay more taxes. best case: you get to not have to do that.

I got a tax of $1 on every 1000 miles I earned from Sprint. 50,000 miles would have been $500 bucks.

Now, they gotta report to the same IRS... why is it so different?

I would so fight this! At leastto reduce it.
Or, send the award back and tell them where the sun dont shine.

congrats though!
:)MM

If you won it in 2004, then you may want to file for an automatic extension so that you don't have to file by April 15th (you can get an automatically approved extension of 4 months by filling out the form and you can get until October 15th if you give a reason).

You can then book a European trip or 2 domestic trips and claim the ticket price being offered (print out something from aa.com). If you find a coach fare for $350 and use the miles instead, couldn't you claim that the actual value of the prize was $700?

Miles are taxed? You can't take a deduction when you donate them to charity because, as I am told the rationale is, the miles aren't taxed when you earn them; I did research on the tax deduction issue a while ago and the law is clear on that, at least.

Here's an idea
 

I don't think it would be accepted to compare it to the cheapest domestic fare and say 25000 miles is only worth a hundred bucks. But you might look at say 20 domestic fares from your home, then average them and say that is worth 25000 miles. Say the average is 250 per RT, that would be a penny a mile. That seems reasonable.
If people are paying over two bucks for a box of cereal to get 100 miles, and then throwing the cereal away, a mile is worth at least two cents to them.

MM, I don't follow. Do you mean you are taxed as if you got $1 in income? I don't know how Sprint would be different than credit cards or other reward programs, :confused: but in any case, you are paying for phone service. You are probably paying more than if you did not sign up for the miles (I'd almost guarantee), so you are buying miles, but obviously cheaper than if you bought them from the airline..

You are taxed on "lottery winnings" such as raffle prizes. I think that is what happened here.

Offsetting Loss
 

IF this was still 2004, you could go to any casino, join their slot machine club and be issued a card to insert in the machines.

You deposit $1250 into the machine in whatever coins it accepts. The casino keeps track of how much money you put in. However, they only report to the IRS amounts won over $1200, so even though their records show you lost $1250, you actually won back appromimately 90% on average, or $1125.

At the end of the year, the casino's will print you out a copy of all your losses if you ask for it, which you are allowed to deduct from all your winnings.

My grandmother does it every year.

If American Airlines Publishing reports your miles to the IRS, you should receive a 1099-MISC with the value of the prize in box 3. If you receive a 1099-MISC and report an amount different than the amount in box 3, you might hear from the IRS.

It would be interesting to see someone take this up with the IRS someday. If they want to deal in FMV, then what is the FMV of something you can't sell? Seems to me it would be zero. #1, the T&C of AA says you can't sell them. #2, if you do sell them, AA no longer will accept them as valid miles - thus no value.

this would not help Greg. If you bet $500 and win 600, you can deduct the 500 and pay tax on an additional 100 in income. If you bet 500 and win 400, you can deduct 400 and pay no additional tax (no, you can't deduct that extra 100 somwhere else).

But Greg bet nothing so far as I can tell, so he has to pay a tax on the FMV of the winnings.
The IRS will take the position that FMV is what a reasonable person would pay for the miles not what you can sell them for.
If you win a car, you know you can't sell it for what it would have cost you. Not to say you should have to declare the list price. But if you shop around and the best you can find is $18,000 for that same make and model (20K list) then that is the FMV, even though you could only get 15K if you're lucky.
I think he can legitimately low-ball the FMV, but nobody would believe him if he claimed the miles are worthless (I wouldn't, would you really?). All those people didn't enter the contest to get something with no value to them.

I may be wrong, but I don't think it matters if you can sell them. The one known fact is that AA can sell them, and $1250 is what they charge for 50,000 miles.

If someone gives you a 5,000 sq. ft. home in Beverly Hills with the proviso that you can't give it or sell it to anyone else, you received something worth more than zero.