BankDirect Starts Issuing 1099s For American Miles

Filed Under: Airline Rewards, American AAdvantage
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BankDirect is a bank that has historically allowed you to earn American AAdvantage miles for the balance you keep in your checking account.

How BankDirect Has Become Less Valuable

Over the years the opportunities to earn American miles with BankDirect have become less lucrative, though. Originally BankDirect had no fees, and you earned 1,200 American miles per year per $1,000 deposited for your entire balance, no matter how much money you had in your account.

Then they made some changes:

One positive thing is that no 1099s have been issued up until now for BankDirect rewards, which has at least helped the value proposition of keeping $50,000 with them. Well, it looks like that’s changing.

BankDirect Will Issue 1099s For American Miles

Yesterday I received a letter from BankDirect informing me that they’ll start issuing 1099s for American miles starting in 2020:

Dear Valued Customer,

We truly appreciate your business and thank you for banking with BankDirect. We wish to inform you that under current tax law, we are now required to report to you and the IRS the value of miles you receive from BankDirect. If you receive miles from BankDirect on or after January 1, 2020, we will issue the appropriate Form 1099 to you and the IRS in January 2021. Since American Airline AAdvantage® miles do not have a defined cash equivalent and the value they represent is subject to various factors specific to each American Airline AAdvantage® member, the amount reported will be based on our good faith estimate of the market value. The estimated market value can be impacted by numerous factors and may materially change prior to the issuance of Form 1099 each year.

BankDirect is not an accounting firm or a law firm and does not provide tax or legal advice. Please consult with your tax advisor regarding the tax implications of this information.

We appreciate your trust and continued support.

How Much Does BankDirect Value American Miles?

The good news here at least is that BankDirect is very conservatively valuing American miles. While it remains subject to change, currently BankDirect estimates that American miles are valued at 0.42 cents, the equivalent of a 0.42% annual yield.

That’s good news, at least.

Crunching The Numbers

If you were to put $50,000 in a Bank Direct account (which is the most you should put in there), then over a year:

  • You’d earn 60,000 AAdvantage miles (I value those at 1.4 cents each, so they’re worth $840)
  • You’d pay $144 in fees
  • You’d be issued a 1099 for a value of $252 (at the highest marginal tax rate, that would cost you ~$93)

In the end you’d earn $840 in rewards and you’d be paying $237 between the service fee and taxes, meaning you’re really earning $603 in rewards. That’s about a 1.2% rate of return, which isn’t exactly great.

I definitely think BankDirect isn’t worth keeping an account with under the current system, though Bask Bank is also emerging, which is affiliated with BankDirect, and offers a better opportunity to earn American miles.

Do you plan on keeping your BankDirect account now that they’re issuing 1099s?

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  1. @ Ben — I though Bask was up and running and that you could open a fee-free savings account that earns 250,000 miles per year on an FDIC-insured $250,000. With the miles being taxed at 30% of their value, that works out to about 2.05% interest if your marginal tax rate is 40%. If your tax rate is lower, as it is for most people, the interest drops below 2%. Overall, I would say this is a decent rate, especially if the Fed cuts rates more; however, you can do better elsewhere right now.

  2. Miles should be taxable if you earn them as part of flying for work or if the flight is in any way expensed. Hopefully IRS gets it together and implements that soon!

  3. @ pixielott46 — The taxation of miles earned on bank accounts has been around for a decade or so. BankDirect has been unique in not issuing 1099s like our friends at Cittiank.

  4. Miles are a deprecating asset, would not prefer to get that over cash that can be invested elsewhere. Much better low risk opportunities available outside of savings accounts. Even for 50k.

  5. Cara- Why are you advocating for taxes? You’re already free to donate extra to the government if you like.

  6. The $12 monthly fee can be avoided by letting your account go dormant (no activity at all, including online access). Then call them a couple of months before it escheats to Texas and reactivate the account. I did this several times, no problem, and it improves the rate of return.

  7. It makes sense that miles earned in lieu of interest are taxable. Still, $50,000 could earn a lot of money elsewhere as you point out in your post. Unless there were a one-time bonus I’m not sure why you would do this.

    Isn’t Citi launching an AA checking account soon?

  8. @cara lockwood – it isn’t the IRS that would do this, it’s Congress. And there are both practical and privacy issues around trying to treat miles earned for work travel vs. personal travel differently.

    @pixielott46 – miles are taxable if earned in lieu of interest income. They aren’t (under current regulations, at least) if earned through flying, credit card use, etc., as they’re treated as a purchase incentive or a loyalty discount, similar to “buy one, get one free” promotions or a discount on gas purchases you earn through using a credit card.

  9. In 2002 the IRS announced:
    Consistent with prior practice, the IRS will not assert that any taxpayer has
    understated his federal tax liability by reason of the receipt or personal use of
    frequent flyer miles or other in-kind promotional benefits attributable to the
    taxpayer’s business or official travel. Any future guidance on the taxability of
    these benefits will be applied prospectively.

    This relief does not apply to travel or other promotional benefits that are
    converted to cash, to compensation that is paid in the form of travel or other
    promotional benefits, or in other circumstances where these benefits are used for
    tax avoidance purposes.

  10. Perhaps what is most noteworthy here is that they are intentionally vague about which Form 1099 they will issue. Will it be 1099-MISC, as Citibank used in 2009, just calling it “other income”? Or will it be 1099-INT, for interest income, as many banks use when a cash bonus is paid to a customer who opens a new account? If it is interest, other taxes beyond the 37% rate may apply to high-income taxpayers. And of course, the 37% is only the federal rate — these are the highest state tax rates: California 13.3%, Hawaii 11%, Oregon 9.9%, Minnesota 9.85%, Iowa 8.98%, New Jersey 8.97%, Vermont 8.95%, District of Columbia 8.95%, New York 8.82%, Wisconsin 7.65%.

  11. I don’t understand taxing miles or points. Per most program terms, you do not own points and they have no cash value. Why would you pay taxes on something you don’t technically own? Would it be fair to pay taxes on the punch card you get at the coffee shop for a free cup of joe?

  12. I thought under the current rules of AA you do not actually own the miles in your account? Wouldn’t that preclude this from being a problem in the first place?

  13. Crappy website, quirky billpay to transfer money around (no direct ach), reduced mileage bonuses, those monthly fees, and just poor customer service had led me to cancel service last year. The only redeeming benefit was the lack of a 1099, but now that’s gone too. It’s like they are going out of their way to lose customers…

  14. I have had the Bank Direct mileage earning account for several years now — and have been on the fence for the past year about closing it. But this new 1099 thing tipped the scales. Called Bank Direct yesterday for instructions on how to close the account. Most appealing for me was to type up a letter, print it out, sign it, scan it, and email it to BD. Did this yesterday. Will hopefully receive a check in the mail soon.

  15. If all you do is collect AA miles and do nothing else (which is what I do) then after the first 12 months the bank stops charging the $12 per month service fee. Because after 12 months of no activity the account is deemed to be inactive then no service fee is charged. Thereafter for the next 35 months you can get the miles without any service fees.

    You do have to send the bank an email in the 35th month that you want to make the account active again or close the account. If you do not then the State gets the amount in your account. However, before that happens the Bank has to notify that you account has been inactive and after 36 months of no activity you will forfeit the principal amount in your account.

  16. I crunched the numbers and if you’re in the top tax bracket in NY then the break even is ~1.3¢ assuming you can get a fully liquid account earning 2.05% (which is a stretch considering the best I’ve seen is 1.99% but maybe I missed something). I value my AA miles at 1.7¢ so this is a no brainer even with a 1099-INT (which is what Bask issues). Bask states no fees, btw.

    Fwiw (and I’m not a tax guy), I believe you can dispute the value with the IRS and use any supported value. That said 0.42¢ is a very low value so if it were me I would just take that value and move on. What’s really interesting to me is that if Bask is valuing them at 0.42¢ it implies that’s what they’re buying them from AA for. Else, they should be using a higher value.

  17. You can always contest the 1099 and adjust the amount on your tax return. Just submit a supporting statement. I think that using the direct quote, “Accrued mileage credit and award tickets do not constitute property of the member” from is a pretty strong statement – if I don’t own the miles then how can I be taxed on their receipt? It’s not income if it doesn’t *come* *in* to my ownership.

  18. @Jon

    That is why people like you need to hire accountants or finance people. At least buy and use those tax softwares.

    You are taxed on income not assets.

    To dumb it down for dummies.
    If you steal a car and sell that car, you owe IRS for that income. At no point in time you ever “own” that car. Made famous by the late Al Capone.

    “if I don’t own the miles then how can I be taxed on their receipt? It’s not income if it doesn’t *come* *in* to my ownership.”

    By the way, IRS is much smarter than people realize, they just don’t have the budget.
    If it was your way I would avoid paying any tax as long as I receive my salary and compensation as miles and points. Hey I don’t own any of them.

    That is why most middle class is in a higher tax bracket than Warren Buffet.

    As @Allen pointer out, what you could do is argue the “value” of AA miles, which unfortunately is hard since 0.42 is already a conservative value.

  19. I suppose I’m the only one who cares to point out that you owe tax whether or not you are issued at 1099. The only difference is that if you are issued a 1099, the IRS will automatically adjust your tax return if you do not include it. Without a 1099 you must be audited by either your state or the federal government.

    Let’s be clear: if you have not been declaring income for this account you are a tax cheat.

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