I understand that frequent flyer miles donated to charity are not tax deductible. However, with a charity’s cooperation, isn’t it possible to, in effect, accomplish the same thing perfectly legally? How about this: I sell 25,000 miles to a charity to use for a ticket. Let’s say they buy them for $500. They obtain a ticket that would have cost more than $500, thus there is no private inurement; they simply got themselves a good deal with the help of a business partner, me.
Alternately, I could obtain the ticket and sell it to them for $500 (essentially the same thing). Subsequently, I donate $500 to the charity. Now I am a donor, not a business partner. In this manner, I get a deduction for the $500 donation, the charity gets a ticket for “free” ($500 in and out), and everyone’s happy. Clearly, one would need to have a relationship with the charity so they would feel comfortable with such an arrangement.
Isn’t this perfectly OK?
I’ll certainly give you bonus miles for creativity.
But as for the specifics, you’re either in violation of the airlines’ rules, in danger of triggering an IRS audit, or both.
To begin with, your first strategy depends on selling frequent flyer miles to a charity. But the sale of miles is explicitly prohibited by all major programs, no matter whether your intent is to help others or enrich yourself. The rationale behind this policy is that the buying and selling of miles, or award tickets, amounts to a gray market in the airlines’ core product—air transport—which would cause a loss of pricing power and reduced profits.
The very same restriction applies to your idea of selling an award ticket to a charity at fair market value, and taking a deduction on that amount. Frequent flyer program terms and conditions warn, in no uncertain terms, that members may not sell, trade, or barter award tickets.
Even if you successfully elude detection by the airlines, there’s the IRS to worry about. The tax status of frequent flyer miles and award tickets has always been a gray area, for at least two reasons. On the earning side, a mile earned for business travel could be construed as income, and is therefore taxable in theory, but a mile earned for leisure travel is considered a discount or rebate, hence nontaxable. Since frequent flyer accounts do not distinguish between the two types of miles, the IRS has found itself unable to tax them. And how can something that can’t be taxed in the first place be deducted at tax time?
And looking at deductibility from the award side, while we use two cents a mile as a rule-of-thumb value for a frequent flyer mile, the IRS has never been comfortable with such imprecision. After all, comparing the dollar value of a revenue ticket to that of an award ticket is clearly an apples-to-oranges comparison. The latter tend to be significantly more restricted, and availability is severely limited. They’re worth less, but how much less? It’s a thorny question that the IRS has chosen to let go unanswered.
I have heard of tax pros who, in their zeal to help clients maximize deductions, will recommend aggressively creative tactics such as the ones you’re contemplating. And I have no doubt that sometimes they sneak undetected by the airlines and escape unchallenged by the IRS. But is your reward worth the risk involved?
If the airlines catch you in violation of their rules, they will summarily confiscate your miles and freeze your account. And having watched my father suffer through several years of IRS audits during my formative years, I personally wouldn’t risk triggering an invasive audit just to save a few bucks on taxes.
You do have a few options, though, if true charity rather than the tax deduction is your main goal. It’s perfectly legal to use miles to purchase a ticket for another person, so you could obtain a ticket in the name of your charity contact and donate it for free. In addition, many airlines have set up programs through which you can donate unused miles to the airlines’ preferred charities; but again, you would not be able to reap any tax benefits.
At least where miles are concerned, charity is best seen as its own reward.