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Frequent Flyer Miles, Credit Card Points and the IRS

Frequent Flyer Miles, Credit Card Points and the IRS

Everywhere we turn, there is a new offer for some sort of credit card complete with benefits such as cash back, credit card points, or frequent flyer miles. Companies like Capital One and Chase are known for their variety of incentives that keep credit card users actively using their product. Back in 2014, the United States Tax Court oversaw a hearing regarding one taxpayer and the IRS where the tax entity claimed the individual understated his income by $563 by not including the cost of a plane ticket which was covered by credit card rewards.

Since this occurrence happened, there has been some confusion around whether or not frequent flyer miles and credit card points are truly considered income by the IRS. The outcome of the specific court case was in the favor of the United States, not the taxpayer. However, the Tax Court was careful to word its decision in a way that only sometimes allows the Internal Revenue Service to claim these credit card perks as additional income.

The clarification leaves little gray for some people. According to the tax code, promotional benefits of credit cards are not to be considered tax liable if they are for personal use. However, in the following paragraph it also states that any of these benefits which can be converted to cash or are used for “tax avoidance purposes”, will be claimed as income. What we learned from the 2014 ruling is that if you have received some sort of incentive for signing up for a new account, such as a $100 bonus for making a deposit in a new bank account, then this is considered additional income. In terms of frequent flyer miles, if you receive Miles as a perk for opening a credit card, then their cash value could be deemed as additional income.

Credit card points on the other hand are considered a rebate. For example, if you happen to be a member with the Capital One Quicksilver credit card which offers its users 1.5% cash back on all purchases, then this is considered a rebate and therefore not taxable. The difference is stated as being that in order to receive these specific points, you have to spend a certain amount of money. The way that you choose to use these points is irrelevant. Once again, using the example of the Quicksilver credit card, cash back can be redeemed for credit toward your bill, gift cards, or used as a purchased eraser.

As many businesses use credit cards with these different perks to fund their expenses, is important to understand that the Internal Revenue Service will not honor any deduction which was paid by your frequent flyer miles or credit card points. This means that if you redeemed points for the cost of a flight for a business trip, then you are unable to claim the cost of this trip as one of your business expenses because it is deemed double dipping. The tax laws regarding the specific situation continue to evolve and change as more offers present themselves to everyday consumers. It is important to say up to date with your tax professional on how changes in tax laws on a year-to-year basis can impact how you use frequent flyer miles and credit card points in your everyday life and for your business.

Attorneys Tax Relief Can Help

If you have found yourself in an audit with the IRS because of unclaimed credit card rewards, contact Attorneys Tax Relief today for a free consultation.

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