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Guest post by: Steven C. Hamilton
Hi Travel Junkies,
One of the more frequent questions that I am asked about points/miles is what impact they have on your taxes. Booking free flights and earning cash back is great and all, but nobody wants to get stuck with a tax bill when they get home.
So I wanted to take a moment today to discuss this subject to hopefully answer some of the more common questions.
How do taxes on points/miles work?
Do you need to claim your free trips as “income”?
Do you need to hire an accountant to help you sort all of this out?
Ok, I lied. I am not going to be answering any of these questions because I know very little about taxes and accounting (my college professors can vouch for that).
But thankfully 10xT Facebook Insider Steven Hamilton does. And will be taking over from here.
Take it away, Steven!
The IRS requires you to report all of your worldwide income. This can include that $20 bill you found on the ground or the value of that rare coin you found in the attic. Sometimes it can include odd things most people would never think of as income such as credit card rewards.
If you earn air miles and points on your credit cards, these could be considered taxable income by the IRS.
Miles and points are not always taxable, but they can be in certain circumstances. So how do you know the difference?
Credit card rewards: Are they a rebate or award? Does it matter?
The key difference is whether points and miles are a rebate or an award. This isn’t usually the language card companies use in their promotional material, so you need to know how to tell which is which.
Rebates are a discount on the purchase and can include cash back, miles, points etc.
They are bonded to a financial transaction. In other words, you earn these by spending a certain dollar amount with your card. These are non-taxable.
Awards are an incentive you receive just for “signing up” and require no financial transaction. Awards are considered taxable income by the IRS. Think of things like that account opening bonus at the bank. (Do they still give out toasters?)
Most Credit Card rewards are a rebate giving you miles when you spend a certain amount. These won’t impact your taxes.
The only possible impact is that Cash Back may reduce the cost of a tax-deductible expense. For example, a business owner must decrease their cost of inventory in a situation where they receive Cash Back or other financial incentives. So don’t use that 2% cash back card to buy your inventory, unless you want to add complication to your bookkeeping and tax returns.
What Does the IRS Have to Say
In 2002, the IRS announced that, due to complications involving the timing and valuation of the income inclusions, they have not pursued a tax enforcement program targeting air miles and points. Tracking how the points are earned and redeemed, and whether each is business or personal is just too much work at this point.
This means the miles are considered tax free as long as you do not redeem them for a cash reward or benefit. You can read that full announcement directly from the IRS here. Unfortunately, they have not commented since or clarified any ambiguities since.
Keep in mind sign-up bonuses that don’t require a purchase, and those bank account opening bonuses, will be treated as taxable. You could even receive 1099 for them.
At least for now, reward rebates are safe from taxation. That $20, on the other hand, is another matter. If you have a habit of picking up loose change on the ground, it’s time to drop it. It’s just not worth the paperwork.
You should not particularly be concerned about tax implications of points. The only time you should have a tax concern about your points is when you use cashback for a business or when you get an account opening bonus. In summary, spend business funds for points and redeem for personal purposes.
Steven C. Hamilton II, EA, NTPI Fellow
Hamilton Tax and Accounting
Licensed to represent taxpayers before the IRS.
Editor’s Note: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.