Reward Programs - Are They Taxable?

Many airlines, credit cards, hotels and car rental companies offer rewards programs. Individuals may earn promotional benefits such as upgraded seating, free services or other benefits. Are these benefits taxable? What if you received these benefits due to business spending, can you use them for personal purposes tax free?

There is not a lot of guidance around the issue; however, the IRS issued the Announcement 2002-18 where it states the IRS will not assert that any taxpayer has understated their 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. In general, the promotional points awarded from these programs are considered nontaxable.

There are some exceptions. The Tax Court required a taxpayer to include $688 in income as reported by Citibank on Form 1099-MISC as the value of an airline ticket received by the taxpayer upon redemption of 50,000 Thank You Points from opening a Citibank account. In Shankar v. Commissioner 143 T.C. No. 5 (Aug. 26, 2014). The Tax Court made the determination that the Thank You points were awarded as interest on a deposit account, not a credit card. “We proceed on the assumption that we are dealing here with a premium for making a deposit into, or maintaining a balance in, a bank account.” In other words, something was given in exchange for the use of Shankar’s money.