Last month the news that United handed out millions of miles as part of their bug bounty program went viral. CNN Money, Fox, Business Insider, the BBC, and many more outlets covered the story of domestic white hat hackers that won at least 1,000,000 miles each for reporting remote code execution bugs on United.com.
Surprisingly none of the news outlets covered the tax implications of being awarded 1,000,000 miles.
Many companies offer cash bounties, but the tax implications of that aren’t as critical. After all, you can just take part of the cash winnings to pay the tax bill. Not so with miles that officially can’t be sold.
The IRS considers miles earned from flights and from credit cards to be purchase rebates which are non-taxable. However I’ve received 1099s for miles earned from opening checking accounts in the past, so miles earned from other sources are definitely taxable.
I reached out to United asking about the tax implications and they responded that they will be sending out 1099s at a value of 2 cents per mile for domestic participants.
So the 1,000,000 mile prize comes with a tax bill equivalent to $20,000 of income. The marginal tax rate for a NYC based household that has $91,000 of total income is 28% federal+3.65% local+6.45% state=38.1%. For that household, winning the miles will result in an out of pocket cost of $7,620. That cost could rise further if the additional “income” also knocks out any other tax deductions due to the higher overall income level.
To be sure, that’s still a decent price for obtaining miles (0.76 cents per mile), but it sure puts a damper on the program. Perhaps not quite as bad as how I imagine the contestants on Wheel of Fortune feel after they realize the real cost of their “free” trip to Jamaica when they get hit with a 1099 for $11,500. But a damper nonetheless.
No, you won’t get a tax bill for telling United to fix a crucial award searching bug, but you will have my thanks. Read this post for how to provide feedback to United about their new site and click on the retweet and favorite buttons in the tweet below to make the issue heard by United:
— DansDeals (@DansDeals) August 5, 2015