American Reducing the Value of Its Miles: And Why That’s a Good Thing

This has nothing to do with American’s elimination of stopovers at North American gateway cities and distance-based oneworld awards>

I’m not talking about American making changes that reduce how we value their miles.

I’m talking about changes to how they value miles when reporting prizes for tax purposes.

There was a story in 2005 that garnered significant attention about a man who turned down a prize offering him 12 roundtrip coack tickets for two to anywhere American flew.

He won American’s ‘We Know Why You Fly’ contest. I always found that to be one of the creepiest ad campaigns, in a pre-Snowden and before the NSA was cool kind of way.

The man turned down the prize because American reported that each ticket would be worth $2200, and so his tax liability was going to be ~ $800 per ticket. The tickets expired within a year, and he quite reasonably didn’t think he’d get as much value out of them as he’d be liable for in tax.

That’s the first time I wrote about disputing the reported value of a prize.

I updated that advice last weekend as folks were scrambling to finish their taxes. It’s important because just because a travel provider says a prize is worth a certain amount, doesn’t mean it is worth that amount. And you should only be obliged to pay taxes on what something is actually worth (the price at which a transaction would occur between a willing buyer and seller).

It seems though that American may only be reporting mileage prizes now at 1.5 cents per mile at least some of the time. And if they’re doing it even occasionally, going through the dispute process we should be able to get reported prices that are higher reduced.

I believe they have. Last year when I won the MoTown the Musical Sweepstakes from American Airlines they valued the 100,000 AAdvantage miles at $1990 or 1.99 cents/mile. I have the paperwork and had to pay taxes on it.

Fast forward to the Fly Like Your Famous Sweepstakes from AAdvantage Shopping, and now the T&C list ARV of 100,000 at $1500 or 1.5 cents/mile.

Remember that the IRS does not tax miles — except when they are reported as prizes.

The lower American’s valuation, the easier it is to pay a lower tax.

With US Airways miles set to become American miles in the near-term, and US Airways offering occasionally sales for as little as ~ 1.2 cents per mile, it’s difficult to justify a higher reported price — or at least it’s reasonable to take the lowest demonstrable price.

That’s a whole lot better than reported valuations of over 3 cents per point — at which point I would decline a prize, too!


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. What is the price point for buying a cash one-way domestic ticket where you will instead use miles? Mine is somewhere now around $180 which is exactly where 1.5 cents per mile would place its value.

  2. Seems to me like they are just “aligning and harmonizing their business structure” or whatever that crap is they kept saying on Facebook. I think they legitimately know they are devaluing their entire program and are lowering taxable value to match.

  3. Well, the main point of your post is that inflation is a good thing because at the end you are paying less in taxes. So far IRS is not considering FF miles as a taxable income except a few specific cases like prizes and certain miles awarded by Citibank.
    Reducing value of miles especially without a notice is a bad thing for vast majority of members of FF programs and there is now way to spin it otherwise.

  4. I know we all dislike the IRS, but it is silly to tax miles but not consider them a form of currency or deduction when donating them to charity. Only the IRS can pick & choose their pie and eat it too.

  5. @Adam – presumably if you donated a prize you could deduct your tax basis for that prize even if it’s miles.

  6. @Alex-149 actually the post has nothing to do with inflation per se, they seem to reporting points at a lower value than their usual retail price for selling points – which is a good thing, since the older inflated value (used by most airlines) is absurd.

  7. I like reading this website and i don’t even fly much.You should make the most out of all the miles you all get…

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