Customers likely to be taxed on Citi bonus airline miles

Taxes can constitute a sizable financial burden for Americans who owe money to the IRS each year. And a recent move announced by Citibank may only increase customers’ tax headaches this filing season.

Citi recently sent out 1099 tax forms to customers who received bonus airline miles for signing up for checking or savings accounts with the institution, leaving them on the hook to pay taxes on their bonus reward. The bank said it plans to label the bonus rewards as miscellaneous income on their tax forms, meaning that the miles customers received will likely be considered taxable income by the government agency. Ohio Senator Sherrod Brown, Senate Banking Subcommittee on Financial Institutions and Consumer Protection chairman, was incensed by the move and wrote a letter to Citibank chief executive Vikram Pandit.

“The last thing Citibank should be doing is creating baseless fear in middle-class families, or placing a nonexistent tax burden on the backs of families who are already struggling to make ends meet,” Brown said.

Citibank stands by the move, explaining that it falls in line with current tax laws.

“When a customer receives a gift for opening a bank account – whether cash, a toaster or airline miles – the value of that gift is generally treated as income and subject to reporting,” said Citi representative Sean Kevelighan.

The institution also explained that the move only applies to customers who received bonus miles for opening a new account. The tax treatment will not affect customers who accrued miles through regular credit card spending. The group plans to calculate each mile as being worth 2.5 cents. For example, a customer who received 25,000 bonus miles may be taxed on the cash equivalent of $625. Currently, the IRS says the move is valid, despite criticism from lawmakers and consumers.

The action may place an additional financial burden on consumers who are already deep in loans or credit card debt and may now be left with a larger tax bill in April. Tax debt can result in liens and credit damage if it goes unresolved, so individuals who anticipate an overwhelming tax bill should consider working with a professional or credit counseling service beforehand to develop a repayment plan.