Your frequent flyer miles may be taxable

Frequent flyers across the country are howling mad over a letter Citibank is sending to many of its customers.

The Los Angeles Times says the letter informs customers that the frequent flyer miles it hands out with many accounts and credit cards are taxable as income, and that it will be reporting the information to the IRS this year.

Uh oh!

The Times says this is the first time a miles issuer has interpreted mile rewards as income, and sets a major precedent.

While airlines and other credit cards are not at this point classifying their miles as taxable income (for instance, Delta Skymiles), that could change once the IRS starts processing Citibank rewards this way.

The report says it's possible other airlines and cards may have to follow suit, based on what happens in this case.

Some Citibank customers are now complaining that they will owe tax on $600 of income because they received 25,000 frequent flier miles as a bonus for opening an account or credit card.  This means they will owe the IRS more than $150, even if they never end up using those miles.

Paying tax on miles will also greatly reduce their value, since each "free" flight will now cost as least $100 in taxes.

What should you do?

Travel agents say if you are a Citibank customer who receives one of these letters,  you will have to claim your miles as income this year.

But otherwise, you should do nothing, and simply wait to see how other airlines and banks handle this next year.

As always, don't waste your money.

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