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August 8, 2005 - My family and I are getting ready to take a trip this summer and want to utilize our frequent flyer miles. The miles were earned mostly from business trips paid for by my employer. Are there any tax consequences to doing this?

When you travel on business for your company, you may earn frequent flyer miles or other promotional benefits, such as through rental cars or hotels. These promotional benefits can be exchanged for free or discounted travel, upgraded seating, travel services, etc.

Even though your employer pays for the business trips, you may be allowed to use the frequent flyer miles and other benefits for your own personal travel.

You'll be happy to know that these benefits won't result in any additional tax to you. IRS's policy is not to collect tax from individuals who make personal use of frequent flyer miles earned on business travel. Thus, you won't be taxed on the frequent flyer miles or other benefits, either when you receive them or when you use them. Likewise, your employer won't withhold income tax and payroll taxes on the value of the benefits.

However, the IRS's policy not to tax frequent flyer miles doesn't apply if the mileage (or other promotional benefit) is converted to cash. In that case, IRS will probably insist that you treat the cash as a taxable fringe benefit.

If you have any miles leftover after your trip, there is an option of donating them to charity. However, come tax time there is not an income tax deduction available to you. Since the value of a mile is hard to determine, the IRS has taken a hands off policy and disallowed any deduction. This hands off policy is both good and bad because while there is no deduction available when you donate them, there is no tax consequence to you when earned.

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