Will Delta be to blame if POINTS one day become taxed? Has there been an earnings shift already?

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if points are taxed on day is it Delta Air Lines fault

Will SkyMiles be taxed as income one day?

We are only two weeks away from April 15th, tax day. Oh joy. I will be finishing up my $60,000 in yearly spending (by paying my taxes for a small fee) on my Delta Reserve card to get my bonus MQMs and SkyMiles and then that card will go in the sock drawer not to see the light of day until after 1JAN2017. When I cannot earn more MQMs or bonus SkyMiles it is time to drive spending to better cards. But today’s post is about more than just tax day and let me warn you I am not a tax professional or a tax accountant. What I am sharing are my personal feelings of what may happen from personal experience.

Delta Air Lines incoming company President Glen Hauenstein has publicly told us he has some grand plans for SkyMiles. He wants them to be something like a living currency, if you will, and for you to spend them (just like cash) on over priced bubbly wine in the Sky Clubs as well as, one day, to blow them on personal services in the clubs (that are often complimentary in quality clubs like those from AMEX like the Centurion Lounges). How depressing and foolish. Notice what he said back in March as reported on AJC.com

Photo Credit Mark Garretson from Twitter pay with SkyMiles for drinks in Delta Sky CLub“We have to find new and creative ways for our customers to burn those miles,” Hauenstein said. “There are other uses in much smaller increments that you can use to control your experience,” such as buying a bottle of champagne in a Sky Club, he said. Using miles for haircuts or massages someday “is not out of the question,” Hauenstein said. – AJC.com (bold mine)

I have been active in the points “game” for a long time. I have been soon blogging for half a decade. I have a good feel for what is going on with points, loyalty and the travel space. Believe me when I tell you there has already been a monumental shift and it is accelerating at an alarming pace. Let me explain what I mean.

Before the airlines, with Delta blazing the way, started to destroy their award / loyalty programs, people would collect airline miles with an almost religious dedication and focus. They were collected for amazing trips to wherever or saved points for years for retirement. Maybe they were used, or maybe they went unused, but the point is loyalty drove behavior and the promise of rewards one day was the motivating factor.

Now all of this works because airlines points are nontaxable as they are considered a rebate. Plus, the airlines can make up any rules they want and change them any time they want. Heck they can even expire points as they please or even make the program go away and then your points are worth nothing. All of this is just fine because points are just a rebate. But could this all change one day? I think it will and I feel Delta will be to blame. Why?

To me there is a HUGE difference between airline award points and a live or cash spendable type currency. If award charts are published, and can be changed as the airlines want, then you know what your rebate is worth. But if award points become worth simply 1 cent each, to be spent on wine or a hair cut, then they have a fixed value. That is not good for so many reasons.

The first horrible reason is because it means the “value” of being able to book an award flight, that could maybe cost a ton of cash, has disappeared as now your points are only worth cents apiece. Then next is the possible tax implications, that is, if they are only worth a penny each, why not impose a tax on this live [and real] currency from the airlines. Scary right?

But I mentioned a shift in the travel space that I am seeing and it is real. I am not the only one seeing that airlines points are becoming less and less valuable day by day. The dream and value of awards like SkyMiles, AA or Alaska points (hello devaluation day{s} just last month) are a tiny fraction of what they once were. Delta, very soon, will offer a 1 million mile round trip award ticket on Delta.com. Let that sink in a for a bit (750,000 point awards are already in place btw). This means you can drain a lifetime of savings in one trip. Shudder. Yikes. Sigh. What impact has this had on the space? A big one.

I am seeing more and more folks moving to CASH. Cash, what cash? I mean cash rewards. When a airline travel point is no longer perceived as a massively valuable dream award that can save thousands of dollars (even if never redeemed for such) then it is time to change your spending habits. It means if a 2 or 3% cash back card is available then that is a 100 or even 200% better choice than an airline point. And it gets worse.

When all of this is in play, why even consider what you earn back from flying an airline when the points are all but worthless? Better to focus on other things like the experience including those in 1st class. Ruh roh for Delta as they don’t have a “real” first class product (or “experience”).

But there is more beyond Delta. Take Southwest (WN) one of the first to basically have a cash type rewards program and Chase. I do not fly WN because they are not all that conveniently located to where I live but also because they do not offer an elite program that I care for at all nor do I like their revenue based earnings or spending program. So, when my wife and I each got a few personal and business WN Chase travel cards we cashed in our 200,000 points for $2,000 in Walmart shopping cards to spend at Sam’s Club for food and such. I agree maybe not the best value in travel but I don’t want to travel on WN so a great value to me. If Delta goes to a penny a point (or less) in value, my guess is many others will feel toward Delta as I do toward WN. See my point?

But the ultimate “nail in the coffin” could be if the tax folks wake up to the Delta changes and decide that since a SkyMile is now CLEARLY worth 1 cent each then it is a really simple thing to tax these points. Double Ruh Roh! This means not only is a SkyMile worth so much less than other points but now that they are taxed as income they are lowered in value even further by your tax rate. That is so scary it is hard to even imagine but I think that time is close at hand. Also the reason I feel Delta will ultimately be to blame is because of the size of their program and the fact that of all the majors they were first to push the program so hard it ultimately gained the notice of those in power. I hope I am wrong.

Could there be any kind of a silver lining from all of these possible changes that Delta would have brought down upon us? Yes, but really in a good way. If an airline point is no longer a rebate but a taxable item with value then airlines will not be able to dump your points or refuse to give you at least the taxable value of those points. Think cash value or cash out worst case. I could see many folks with say 20,000 SkyMiles demanding a check for $200 from Delta to be sent to them. Good for them, bad for Delta. Again, I think it is just a matter of time before I see something like this happening. Delta says they are making changes because of the massive liability all the SkyMiles represent on the “books”. Well if points becomes “real” money then yes they have gone from airline funny money with no real value to a real debt on the books.

What do you think? Am I spot on about all of this or out in left field? Do you think all of this will happen soon, sometime in the future or never? Have you shifted your spending from points to cash type rebates? Let me know! – René

 

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9 comments

  1. I don’t disagree with the premise of your post at all, but Southwest’s loyalty program consistently ranks relatively well in surveys, and Southwest carries more passengers domestically than any other airline. How do you explain that? More of their customers are just not that into ” travel hacking” or something else?

  2. @MJ – Did not say there is anything wrong with Southwest. It is just not for me. I would never ever get an upgrade if everyone at Southwest went to Delta so happy there are those who like their program.

  3. Taxing Points is not a new idea. It’s been floating around for decades, ever since American Airlines started their program. The problem for the IRS is that there’s no easy way to value points. How many people have collected points and then they expire? If you try to tax the points as they’re used it is also extremely difficult; what is the value of a business class ticket from JFK to NRT that makes 2 stops and has a layover because there are no award tickets available on a non-stop. And who gets taxed? The person whose points are being used. And then if they have a companion is that a Gift to the companion under IRS Rules. That’s why I don’t think it will ever be taxed. And if some day, Bernie decides to tax the 1% largest recipients of Points, then the Programs will all disappear and they will all become Cash Back programs. It will be a HUGE mistake.

  4. It really doesn’t matter if miles/points become a fixed value for personal cards – they would still be a rebate, although sign up bonuses (especially those with no or low spend requirement) could be considered taxable income. The real danger is that having a fixed value for miles/points would make it easier for the IRS to consider miles/points from business cards or from purchases on personal cards reimbursed by a business as taxable income to the individual receiving the miles/points.

  5. I know enough about federal tax to know I have nothing to add to your theories on miles being taxable income and a liability on airline books. If airline miles are considered a rebate with a fixed value, then that would seem to add further to the position that business travelers receiving these rebates are in a conflict of interest with their employers and that those rebates rightfully belong to the company that paid for the ticket not the employee. Revenue-based programs add further fuel to this position because the amount of the miles or rebate “earned” is based solely on the amount the employer pays. A fixed value for ff miles would certainly make it easy for a company to require that employees report that value and then claw it back from the employees.

  6. We already pay a TAX when we buy a trip with miles and in some cases a hefty fuel charge(TAX) a surcharge to use the miles(TAX) and a fee(TAX) to move them!!!!!i’m sure it can get worse as the GOV wants and needs more of our$$$!!!

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