As any frequent traveler knows, racking up frequent flier miles can be a rewarding perk for loyal customers. Free miles are a great way for business travelers to receive free travel, seat upgrades or other perks, such as free lodging. Because they're an intangible asset whose value is difficult to fix, the Internal Revenue Service doesn't regulate frequent flier miles in most cases, and fliers who use their miles to purchase tickets and are reimbursed for the expense generally don't need to declare the income.
IRS and Frequent Flier Miles
Since 2002, the IRS has been open about its hands-off stance toward frequent flier miles. For the most part, the agency doesn't require taxpayers to report the value of benefits they receive from frequent flier miles, unless they're exchanged for cash rewards from the airline itself. Because of this, fliers are free to exchange their frequent flier for any sort of nonmonetary reward without claiming its value on their taxes. The IRS only requires taxpayers to claim the value of rewards if they're given after providing information, such as marketing research compensation.
The IRS allows taxpayers who receive travel reimbursements to claim the reimbursed amount on their income taxes using Form 2106. When allocating expenses, such as reimbursements from using frequent flier miles to purchase airfare, taxpayers must report all income used to purchase travel expenses that wasn't claimed on the employee's Form W-2, including the reimbursed value of the ticket price at general purchase. Employees who receive additional travel stipends should include all stipends, not merely reimbursements, for travel. Travel reimbursements are nontaxable income.
General Information on Reimbursements
Employees who receive reimbursements for travel and other business expenses generally don't need to report the amount as income if the reimbursements are made under an accountable plan. To qualify as an accountable plan, reimbursement policies must require workers to report their expenses to their employer in a timely fashion and employees must return the excess amount of any reimbursement payment that exceeds the actual expense the employee originally incurred.
Exchanging Miles for Cash
While frequent fliers who use their miles in exchange for rewards don't need to claim the value of those perks on their taxes, those who exchange miles for a cash reward must. Personal frequent flier miles exchanged for a cash reward must be claimed as income on taxes. The amount received in cash exchange for miles must be listed on Line 21 of Form W-2, as with all other miscellaneous income. The IRS taxes this income at the taxpayer's marginal income rate, although FICA taxes aren't levied from this nonwage income.