With the IRS ruling saying business travel miles are not subject to tax, would any American Express Membership Rewards converted to cash be subject to tax and have to be reported? Also, are there any miles-to-cash programs for which the money has to be reported? Thanks for your help.
This is an interesting variant of the more common question: Are miles earned for business travel but redeemed for personal travel taxable as income? The IRS recently weighed in on this issue, ruling that taxpayers are not required to report such miles, at least in part because the value of award tickets would be difficult to compute.
But for your question, because the award is cash, there is no such uncertainty as to its value.
For context, the very popular American Express Membership Rewards program allows members to redeem their points for cash: e.g. 20,000 points for $100. And other programs offer awards that are just as straightforward from a valuation standpoint. For example, Diners Club Rewards members can redeem 10,000 points for a $100 savings bond or for a wide variety of good-as-cash gift certificates. Hilton HHonors offers members a $75 Tiffany gift certificate for 35,000 points. Marriott allows its members to redeem points for hotel certificates in dollars, yen, pounds, and euros. And so on.
Which brings us back to your question: If earned for business-related activity but used for personal purposes, should these cash or cash-equivalent awards be considered income and reported for tax purposes?
Since the question related specifically to American Express Membership Rewards, I first posed it to them, assuming their legal department would have rendered an opinion on the issue. Unfortunately, their response was to quote the program’s Terms & Conditions: “Tax liability is the sole responsibility of the member.”
I then ran the question by Eva Rosenberg, tax expert and publisher of the TaxMama.com website. Her opinion:
“While we all applaud the IRS’s generosity at letting us off the hook with taxation of frequent flyer miles, don’t expect the same leniency when you convert them to dollars.
“The miles have a nebulous value. They could be used for business or personal travel. They can be transferred and multiplied. They can be gotten from travel or other actions. It’s all too hard to quantify.
“But, money?now, that’s easy. Cash it in?and report it as income. You would report it as other income, if the mileage was personal. Business income if it came from business travel. Use your best judgement.”
Sorry you asked…?
The above is a good faith, best-effort interpretation of the tax code. Bear in mind that only the IRS can rule definitively on tax questions.