Special tax rules for taxation of frequent flyer miles

By | January 26, 2014

When traveling for business, taxpayers often will earn different types of frequent flyer miles or other promotional benefits, such as through rental cars, trains, or hotels. Eventually, these promotional benefits and points can be exchanged for free or discounted travel, upgraded seating, travel services, etc. Most major airlines offer frequent flyer programs under which passengers accumulate miles for each flight. Individuals may also earn frequent flyer miles or other promotional benefits, for example, through rental cars or hotels. These promotional benefits may generally be exchanged for upgraded seating, free travel, discounted travel, travel-related services, or other services or benefits.


Are Frequent Flyer Miles Taxed?

The tax issue with frequent flyer miles kind of arises because, even though the business trips are paid for by your employer, you may be allowed to use the frequent flyer miles and other benefits for your own personal travel. If the government imposes tax rates that are high enough, people will do what they can to get around them. Frequent flyer and other loyalty programs did not arise as a way around payroll and income taxes. But the fact that the rewards are generally tax free to the recipient makes them that much more attractive to all concerned

However, under favorable IRS regulations, earning frequent flyer miles won’t result in any additional tax to you. The IRS’s policy is not to collect tax from individuals who make personal use of frequent flyer miles earned on business travel. Thus, taxpayers will not be taxed on the frequent flyer miles or other benefits, either when you receive them or when you use them. Likewise, your employer won’t withhold income tax and payroll taxes on the value of the benefits.


Frequent flyer miles converted directly to cash

However, if frequent flyer miles are converted directly to cash, then the IRS will impose a tax. Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.