Saw a reference to a chapter headed Taxation of Frequent Flyer Miles in Randy's Official Frequent Flyer Guidebook.

What is the possibility that discussions such as that here on the value of FF miles will ultimately allow the IRS to set a value on miles?

Bruce

I would say very near zero.

The slightly longer answer is that taxing such miles would be an incredible nightmare. Undoubtedly the cost would exceed the benefit.

There are innumerable posts on this. You might want to start with "taxation" or "IRS" and run the search engine.

Boy, I wish I could tell you. If I could, I probably wouldn't because I'd be on a plane to Vegas to get the biggest marker I could and go on a sprts wagering binge. .

Seriously, though, I think it will never happen in the near future. Two many powerful interests involved. besides, if Congress is going to not tax internet sales because it's unpopular (no other good reason), there's no way they'd do this.
Plus, the valuation methodology would be nuts. Finally, taxation would kill these reward programs. Think about the value of the benefits we as frequent travellers get.

Take this as a hypothetical.

Traveler A, a platinum SPG member, had earned two free weekends worldwide by staying 10 nights at the lovely Four Points Omaha South for $59 a night. Traveller A decides he or she will take a loved one to the beautiful St. Regis Dana Point, scheduled to open in August. These nights are free, and because of his or her elite status, A and his or her friend/loved one are put in a gorgeous suite, valued at a rack rate of $2500 a night.
Additionally, A bought 2 round trip tickets on Continental to Orange County for $300 each. But, because he or she is a gold member, they are upgraded to FC, the cost of such a ticket being $2500 each.

Thus, arguably, for a cost basis of about $1200, A and his or her guest get about $10,000 in retail value goods for a cost of $1200. If A was in the 39% bracket, this would theoretically be taxable income of about $8800, leaving A with a tax burden of about $4000 just for this trip alone.

As you can see, such accounting would make such a "free" trip no longer free. You would see elite travellers turning down upgrades because they would not be affordable. This would decimate these marketing programs, and all of the associated industries which have built up over the years. Because of the difficulty in accounting for frequent travel benefits and because real taxation of miles and other benefits as income would destroy the industry, I seriously doubt such a plan will be seriously considered.

Of course, I'm not psychic, or I'd be on the plane to Vegas.
P.S.
I'm also not an economist, and by no means a tax expert nor a travel expert (if there is such a thing). Nor obviously a spelling expert. But this is my 5 minute take on the question at 11:30 at night with a slight temperature. No legal advice given.

[This message has been edited by BoSoxFan45 (edited 05-01-2001).]

I think you could come up with a very easy formula for taxing the value of frequent flyer miles. You could tax them on a worth of 2 cents a mile, or whenever used, the value of the service provided at the lowest advance purchase that the product was offered by the vendor. For example, if you cash in 25,000 miles for a free ticket to go from PDX to BWI the value would be what the lowest advance purchase fare for that market has been using past averages--in this case it would be $198.00. This would be easy to understand, and figure out the tax you would have to pay.

I do not agree that this will never happen. There has allready been movement torwards this with the taxation of miles being sold by the airlines to third parties. It is only a matter of time before taxs on mileage will happen.

Tango, you don't adress what this would mean to the future of these programs.

Also, you offer 2 different criteria for valuation. First 2 cents per. Second, on redemption. But both of these things may happen in separate years.

How do you deal with someone like me, who only uses miles for last-minute trips or other things that are exceedingly expensive? Or how about if I get 50,000 CO miles from a $200 ticket because of bonuses, then convert those into 100,000 Hilton points and stay in Hawaii for a week.

Or do you charge me for the 2000 miles I earn on a last-minute R/T Y fare to DCA that costs me $1500? I have lost money on this. My basis is $1500, but my "income" is only about $40, based on the .02 per mile formula you propose. Do I then get to deduct the other $1460?

This is preposterous. A phenomenal hassle.
Plus a potentially huge expense.

The end result is that I would no longer be a member of a frequent traveler program. I think others would not do so either. I have no need to expose myself to additional tax liability and hassle.

Tax these things, and I likely never come back to this board, and refuse miles. It would hurt the travel industry incredibly much.

I am not in favor of taxation on miles but the IRS has other ideas. Since they are currently taxing the selling of miles, they have opened the door to taxing the usage of miles. The two examples I stated above were just examples. The most likely one to be implemented would be the 2 cents a mile. It would not matter what the "cost/value" the ticket/stay/rental would have cost you but rather the number of miles you used. This keeps it clean and simple.

The collection of mileage/point usage could easily be done whenver you redeem miles. At the time you claim your reward, you would need to provide your SS number and this information would be forwarded to Uncle Sam. Talk about Big Brother

If you participate in any of the telephone offers for "free" mileage or car rental mileage, you are allready paying this tax--just look for it on one of the tax lines in your bill/invoice.

Even though I would hate to pay the tax on miles, and would fight it tooth and nail, the tax bill would still be much less than the value you would get from using the miles.

Also keep in mind that Congress is right now proposing a five-cent tax on each email sent from the US. In most versions of this legislation, bulletin board posts will be legally considered emails. I know this is true, because one of my cousin's friends knows somebody who has a roommate who works on Capitol Hill.

He also said that the email tax will probably pass right through Congress along with the Frequent Flyer Income Tax that is also in its final stages of revision. Since 120000 miles = a $12000 int'l FC ticket, Congress is setting the value at a dime per mile.

There is no tax on the frequent flyer miles themselves, but on the cash value of the ticket that is issued when those miles are redeemed as award travel.

Easy enough of an explanation?

[This message has been edited by ETOPS01 (edited 05-02-2001).]

i wouldn't worry about this one a whole lot right now.. the tax currently payed is the transportation tax charged to those who provide miles in exchange for services, i.e. your long distance provider, car rental agency, etc.. and has little if anything to do with valuation for income purposes.. the existing tax has nothing whatsoever to do with the income tax..

implementing a tax on frequent flyer miles isn't real workable for a multitude of reasons.. already highlighted here is the basis/valuation aspect.. everyone rightly values their miles differently, especially with the recent continental and hilton bonuses providing for literally tens and even hundreds of thousand of bonus miles.. everyone redeems their miles for different things, ranging from upgrades to free trips to goods and services.. the fact that you wouldn't pay $8500 for that first class ticket to australia and yet barely have a second thought blowing 150,ooo miles to get there in first has little if anything to do with the valuation..

the accounting for the miles is another huge problem.. what if i decide to use my miles to obtain an airline ticket for my father or my brother?? the irs doesn't tax gifts.. (ok they do in some instances but not in most).. would they then start taxing me on award redemption that is a gift?? probably not.. would this then open up a huge loophole whereby people would trade awards?? probably..

the frequent flyer miles is sometimes viewed by the irs as a discount on the ticket price against future travel.. with all the bonuses that one could get on a single flight to japan or singapore now this would blow away their whole system of valuation.. i.e. without a discount for the ticket price paid, what is the basis for the miles?? it cost you something to get them, for which a deduction should be allowed..

what about all the miles currently out there?? a recent figure puts this at 3.5 trillion miles.. i'd love to see the irs try and form a basis for these miles.. without a basis they can't really tax the benefit..

when is an award redeemed?? if i transfer 20,ooo starwood points to 25,ooo airline miles have i redeemed an award and should i pay tax on it?? or do i pay tax on the 25,ooo miles when i redeem them for my coach ticket which could have a value of anywhere from $208 to $1800 depending on when i purchased it?? or should i only be responsible for 80% of the value of this ticket because 20% is unearned compensation and thus taxed differently than regular income..

can you imagine the uproar from the airlines, hotels, car rental companies, etc. whose marketing departments would have to come up with all sorts of new programs to keep one loyal?? although it would be nice as free upgrades would probably come back, albeit unconfirmed until the flight attendant comes back to you in seat 56F and invites you to come to the empty first class cabin on your flight lga-pbi.. or maybe the airlines will just take delta's example one step further and remove the first class cabin altogether and not have to worry about miles or upgrades or anything else that might allow them to retain loyalty and instead become a fast bus service..

sorry i rambled a bit.. btw: i'm not an attorney, nor do i have nearly enough knowledge of the ins and outs of the tax code for you to rely on anything i wrote here for much more than what a print out of it might be worth.. although your local congressman would probably love to hear any ideas on the topic you have..

I think one of the primary disincentives to creating a tax on frequent flyer miles is the fact that our legislators are some of the greatest beneficiaries of fat frequent flyer mileage accounts. Our legislators aren't too keen on creating a new tax which will impact them pretty severely.

I feel assured that our miles are in a tax-safe shelter.

One of the problems with such a tax is that the frequent flyer miles are considered to be in the nature of a rebate, which is not taxable.

Of course, this applies only if you are paying for the flight that earns the miles. If your employer is, and letting you use the miles for personal uses, the IRS could consider this a benefit of employment and thus taxable.

The e-mail tax thing is an idiot e-mail urband legend thing which is crap. I would hope that you realized that, but thought that this note should be attached just in case people out there are gullible.

Another thing to keep in mind: I recently paid close to $140 in taxes on a ticket. The government is getting their cut of our travel already, technically speaking, taxing our miles would be an illegal form of double taxation.

Like it or not you get double taxed all of the time. I could cite numerous examples but it is to depressing.

An urban legend? Really?

Yes,it was one such message that actually prompted my inquiry:

It was from a Canadian who said that Canada was already taxing miles received from business travel that was tax deductible. Apparently the business just includes a value of the miles as part of your income.

But the IRS doesn't have to tax the flyers, just the business. They can treat it as a rebate to the business which has to be deducted from their deductible expenses. I think that the IRS has actually tried some variant of this in Florida.

Also I had my own hassle with the IRS in deducting miles as a donation. They finally let me claim the donated miles as a deduction, but only after a hassle and proving that I had earned all the miles on my own paid travel. They didn't really allow it, they just said they weren't contesting it as of now.

I don't think taxation of flyer miles earned on tax deductible flights is at all impossible, particularly if it now the practice in other countries.

Bruce