Citibank customers were in for a surprise when they got emails saying that they have to pay tax on Airline miles. The bank claimed that those who opened a checking or savings bank accounts with Citibank were subjected to 1099 tax forms as miles is considered to be miscellaneous income. However, those who used credit cards of Citibank were exempted from paying such a tax. This further created confusion among the customers.
It was found that few customers were notified to pay several hundred dollars of taxable income for what they thought to be as free perks. Some customers were shocked to receive a tax form of 1099 mentioning they have to pay $645-$750!
Some tax experts say that most frequent flyer miles earned by credit card holders are not taxable. Frequent flyer miles, cashback schemes and other in-kind benefits are treated as rebates and are not taxable. According to Citibank, customers are provided free miles as a gift for opening an account with them. This gift is actually treated as income and subject to reporting. Citibank claims that the January and May 2011 promotions had clearly stated that taxes will be imposed on miles. But, their February 2011 promotion is quite vague and the 1099 tax form has not been mentioned. The surprising part is that none of these disclosures talk about the high per mile price in which 2.5 cents for every mile will be charged leaving the customer in a fix trying to make ends meet.
IRS spokeswoman Michelle Elridge agrees with Citibank on this term and explains that frequent flyer miles offered as a premium for opening a financial account can be a taxable situation subject to reporting under current law. However, she added that the value of the free miles awarded for opening an account would be according to how much they would be worth to a customer and not how much the bank paid for them which are obviously less. She continued saying that under the income tax law, the tax imposed on the taxpayer is the value of the property received and not what the business had spent to acquire the property. Other types of reward programs awarded by other companies other than airline free miles may also need to be reported but that depends on the nature, value and other facts and circumstances concerning the particular incentive. So far, the IRS has not issued any official guidance on this matter after the clarifications from IRS media relations folks. It was also reported that Sen. Sherrod Brown, chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection was extremely disappointed with this clause and has asked Citibank not to evoke fear among the middle-class families who are already under financial pressure