The first frequent-flyer program took off back in 1972. Since then, nearly every airline has launched one, and hotel chains have climbed aboard, too. Loyalty programs are so popular that over half of all credit card purchases made in the U.S. are made with cards tied to loyalty programs. That's especially astonishing when you consider how cramped the airlines have made their seats and how many "junk fees" they've loaded up on — for checked bags, overhead bin space, curbside check-in . . . the list goes on and on. (Michael O'Leary, head of Ireland's Ryanair, actually proposed charging to use the loo.)
The IRS recognizes six kinds of frequent flyer miles, and taxes them according to how you receive them. These include:
- Miles awarded for travel (nontaxable)
- Miles awarded for credit card use (nontaxable)
- Miles awarded in connection with business travel (nontaxable but mainly because it would be too hard to track)
- Miles awarded for opening an account (taxable)
- Miles awarded for putting money in a mutual fund (which reduces your tax basis in the fund)
- Miles awarded as prizes (taxable)
For the most part, those rules make sense. (Would it really be worth the hassle to require business travelers to report the value of frequent-flyer points they redeem for personal travel?) But now it appears that change is on the radar. Last August, the Service released its 2013-2014 "Priority Guidance Plan" that included a project modifying the accounting rules for loyalty programs. And last month, a group of four major travel associations sent a letter to Treasury Secretary Jack Lew urging him to reject any changes to those rules.
It may be that changing the way the IRS treats loyalty programs at the airline level doesn't necessarily mean taxing the awards they grant their members. But does anyone doubt that airlines — who now charge for luxuries like pillows and blankets — will pass any new tax costs through to passengers? (If we're lucky, the new tax will arrive as late as your last flight did!)
We realize the prospect of taxing your frequent flyer miles doesn't keep you awake at night. But make no mistake about it, Washington is looking for new ways to pay for government. Pilots never take off without filing a flight plan — so why would you try to manage your finances without a tax plan? Call us for that plan, and you might be upgrading your next seat to first class!