I Got an Airline Voucher for Being Bumped. Do I Owe Taxes?

Bigger payouts from the airlines could get a review from the IRS. Here's what a tax expert has to say.

Unless you’ve been living under a rock the last month, chances are you heard about the passenger-crew-police altercation on a United Airlines flight that led to a passenger being dragged off the plane to make room for a United employee.

You probably also heard about United’s ensuing policy changes that will hopefully keep such an altercation from happening again, particularly the airline’s decision to increase the amount it will offer passengers who volunteer to be “bumped” from their flight.

That new amount is $10,000, and while it’s highly unlikely you’ll ever be offered that big a payout, you might be wondering what, if any, tax consequences would arise from that kind of cha-ching moment.

First off, it’s important to note that you’re probably never going to get cash for voluntarily agreeing to take another flight, so there’s no big shopping spree in your future. Any compensation is probably going to be a voucher for future flights and services. Quick note: If you are involuntarily bumped, the Department of Transportation requires the airline give you a check instead of a voucher if you request it. Such a payment likely would not have tax consequences. (Your airline credit card may help keep you from getting bumped. And if you’re ditching United altogether, here are four airline credit card alternatives.)

We talked to Mark Luscombe, principal federal tax analyst with Wolters Kluwer Tax & Accounting, about some of the possible tax consequences you should keep in mind in the unlikely case you get a $2,000, $5,000 or even $10,000 payout from an airline.

To Tax, Or Not to Tax. Is That Even a Question?

“You start off with the problem that, in general, anything that’s received in the way of compensation or payments are taxable unless you can find an exclusion in the tax code for them,” Luscombe said. “There’s no specific exclusion for this, and the IRS has not really directly addressed the issue, so you have to sort of analyze by analogy.”

In doing so, most people agree that things like airline vouchers probably aren’t taxable, Luscombe said. That’s based in large part on an advice memorandum to an airline about a decade ago outlining how the airline should handle these voucher payments for their own, internal accounting processes.

“In that memorandum, the IRS basically took the position that the airline could not defer part of their income for selling the ticket contingent on whether a possible voucher is ultimately used,” he said. “[The IRS] viewed it as what the passenger is really paying for. Their initial ticket is a whole package of services.”

Luscombe suggested that, because the IRS views the vouchers as part of the original transaction and doesn’t allow the airline to defer income (basically, claiming it as a liability on their books) for those vouchers, they likewise would not see them as income for a passenger, but rather the airline holding up its end of the contractual agreement between the passenger and airline.

So, in a nutshell, it’s unlikely the IRS would seek taxes for your voucher. However, the increased payout amounts airlines are now offering that total thousands of dollars do have the potential to make the IRS take a second look, Luscombe said.

The vouchers can be considered somewhat similar to an insurance payout. Say, for example, your house catches fire and your insurance pays you to take care of the damages. Those payments are, generally speaking, not taxable under the tax code. “But they can be taxable if the recovery is viewed as excess in some way,” Luscombe said.

So, could the same be true for a $10,000 airline voucher?

“You do get into the issue here when you’re talking about $10,000 as to whether the IRS might take another look at this and say, ‘well, this has moved into a new realm,’” he said, and could potentially reconsider whether these payouts for being bumped are considered “excess.”

While a $10,000 voucher for getting bumped from your first-class trip from New York to London probably wouldn’t be considered excessive, that same voucher for your coach-class trip from Los Angeles to Albuquerque possibly could. So, if you receive a voucher in an amount that is worth significantly more than you paid for your original ticket, it’s wise to play it safe and talk to a tax pro about whether you need to declare it on your tax return.

“If more dollars are getting involved here, then it’s possible the IRS will decide to address it, so it’s probably always a good idea to check with your tax professional about what the current state of the law is,” Luscombe said.

Remember, being truthful and accurate on your tax return can save you a lot of headaches, including the possibility of being audited by the IRS. If you’re unclear about something, it’s always best to reach out to a professional for guidance. Most importantly, whatever you do, don’t avoid paying your taxes. It can result in serious fines, potential jail time and can wreck your credit.

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Can Your Airline Credit Card Keep You From Getting Bumped?

Find out how the right card can help you keep your airplane seat.

Getting bumped from a flight can be a trying experience, as evidenced by the viral video of a passenger being removed from a United Airlines flight. (Thinking of ditching United? Here are four solid airline credit card alternatives.)

While the situation almost never gets that extreme, many airlines overbook flights and getting bumped is a very real possibility for air travelers. If passengers want to keep their seats, having an airline-branded credit card can help.

Membership in a frequent-flyer program generally makes a passenger less likely to be bumped, said Cecilia Minges, a spokeswoman for AirHelp, a company that provides legal advice to passengers whose flights are delayed, canceled or overbooked. The federal Department of Transportation requires airlines to explain how they decide who gets bumped off oversold flights.

While having a certain card won’t directly help keep you on a plane, having elite frequent flyer status often can, and many cards help holders attain that status. The big three U.S. airlines — United Airlines, American Airlines and Delta, (none returned Credit.com’s requests for comment by press time) — have similar policies on bumping, which take frequent flyer status into account. But their branded airline cards vary in their ability to help you earn elite status.

Here’s a closer look at the policies of America’s three biggest airlines.

United Airlines

United Airlines’ contract of carriage — a document outlining the rules it applies to passengers — says the status of a passenger’s frequent flyer program membership, along with the cost of their fare, their itinerary and when they showed up for check-in may determine whether they are bumped or not.

Having a United Airlines credit card won’t confer a higher status in the United MileagePlus frequent flyer program. Only earning the requisite miles by flying with United and its partners will get a passenger to a Premier level. However, having a United Mileage Plus credit card can help you get there faster. United’s credit cards all award two miles for each dollar spent on tickets purchased from United, though signup bonus miles don’t count toward Premier status.

American Airlines

American Airlines’ contract of carriage contains language similar to that of United Airlines. Membership in its AAdvantage program is one of many factors it considers in deciding which passengers to bump.

Both the Citi AAdvantage Platinum Select World Elite Mastercard and the AAdvantage Executive World Elite Mastercard help cardholders earn miles faster — two miles for every $1 spent on American Airlines purchases — but only the Executive World Elite card awards 10,000 miles that will help qualify you for elite status, and only after you spend $40,000 in purchases in a year. The lowest level of elite status in the AAdvantage program, Gold, requires 25,000 Elite Qualifying Miles. (Full Disclosure: Citibank advertises on Credit.com, but that results in no preferential editorial treatment.) 

Delta Airlines

Delta Airlines also favors high-status members of its frequent flyer program when deciding who will get bumped from flights. Unlike American and Delta, it specifies exactly how much it favors elite members.

Its boarding priority rules place Diamond, Platinum and Gold Medallion members behind only passengers with disabilities, unaccompanied children, the elderly and members of the U.S. Armed Forces. Silver members are a few tiers down.

In a recent change to its policies reported by the Associated Press, Delta plans to let its employees offer close to $10,000 to coax customers to give up their seats. The airline’s previous max award was $1,350.

Delta’s branded cards offer signup bonuses that count toward qualifying for elite status. For example, the Delta Reserve Card awards 10,000 Medallion Qualification Miles after the first purchase on the card. Reaching Gold status, which means almost never being bumped, requires 50,000 Medallion Qualification Miles.

Before you apply for any new credit card, especially a reward credit card, you’ll want to be sure your credit is good enough to qualify. You can check two of your scores free on Credit.com.

Other Ways to Avoid Getting Bumped

Policies vary by airline. A representative for Southwest Airlines said the company didn’t consider whether a passenger has a Southwest credit card. Rather, passengers are bumped in reverse order from when they boarded, irrespective of other factors like how much they paid.

In most cases, Minges said, the more you pay for your ticket, the less likely you are to get bumped. That’s because when airlines bump passengers, they have to compensate them based on their fares, per DOT rules.

For example, if an airline bumps a passenger and arranges substitute transportation that gets them to their destination between one and two hours after their original arrival time, the airline has to pay 200% of their one-way fare, up to $675 max. Any later than two hours and they must pay 400% of a passenger’s fare, up to $1,350 max. If you paid with miles, compensation will be based on prices for other tickets in the same class.

These compensation numbers are updated every two years to account for inflation, said Charlie Leocha, president and founder of Travelers United, a Washington, D.C., advocacy group. So there’s an incentive for airlines to bump people who paid less for their tickets, Minges said. Because of that, buying a higher priced ticket, in addition to joining the airline’s frequent-flyer program, are among the surest ways to keep your seat, she said. “It’s not guaranteed, but it can help.”

Here are some other moves Minges suggested:

  • Check in early, when fewer people fly.
  • Get to the gate early. Some airlines, like Southwest, bump people based on when they check in or arrive at the gate.
  • Check your luggage. It’s easier for the airline to bump people without luggage because they don’t have to find their bags and get them off the plane before it can take off.
  • Pick the right airline. As we said, different airlines have different policies. Each airline posts their contract of carriage online. Dig through the legalese and you can find their overbooking policy. Some are friendlier than others.

At publishing time, the Citi AAdvantage Platinum Select World Elite Mastercard and the AAdvantage Executive World Elite Mastercard are offered through Credit.com product pages, and Credit.com is compensated if our users apply and ultimately sign up for these cards. However, these relationships do not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

Image: Tommaso Tagliaferri

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The Airlines Americans Hate the Least

So you finally made it through airport security and stuffed yourself into that tiny seat (at the back of the plane). You’re filled with an overwhelming dread of missing your connecting flight from all the time you’ve been sitting on the tarmac waiting until it’s your turn to take off. And when you finally arrive at your final destination, you discover your bags ended up in a better place than you.

After all that, if you managed to remain well-disposed to your favorite airline, you’re not alone. Many Americans stay loyal to their favorite airlines despite everything they may have gone through. (Reminder: When the World Airline Awards were announced this summer, not a single American carrier cracked the top 10.) Now, thanks to Airfarewatchdog, an online flight cost comparison site, we know which airlines Americans dislike the least. The site conducted its fifth annual domestic airline comparison survey and deemed Alaska Airlines travelers’ favorite for the second year in a row.

These rankings are based on domestic airline performance in five key areas: canceled flights, customer satisfaction, denied boardings, mishandled baggage and on-time arrivals. According to an email from an Airfarewatchdog spokesperson, each of the categories were weighted differently (for example: denied boardings don’t happen as often as canceled flights, so denied boardings were weighted less).

Most of the information reviewed came from early 2016 Department of Transportation reports, except the customer service information, which came from the 2016 American Customer Satisfaction Index.

In an email, Airfarewatchdog president George Hobica said that, “overall, airlines are doing a better job in pleasing and serving consumers, which suggests that airline consolidation hasn’t been the disaster that many feared.”

The top airlines for overall performance were:

1. Alaska

2. Delta

3. JetBlue

4. Southwest

5. Virgin America

6. Frontier (tie)

6. United (tie)

8. American

9. Spirit

“We’re always working to improve our operation,” American Airlines spokesman Joshua Freed said in an email. “I would also note that we had the highest score among the network airlines in the American Customer Satisfaction Index.”

Spirit Airlines did not immediately respond to Credit.com’s request for comment.

Saving on Your Next Flight

No matter which airline you prefer to fly with, there’s no denying that flights get expensive. But there are ways you can save, like getting an airline credit card that offers rewards points (you can see the best airline credit cards on the market here). But, while these credit cards offer some perks you may enjoy, getting into debt to save on checking your bag simply isn’t worth it. And don’t forget — reward credit cards are usually ideal for people who don’t carry a balance. Otherwise, you’ll lose all those great rewards to interest payments. To see how paying your credit cards balances in full each month helps your credit score, you can take a look at your free credit report summary on Credit.com.

Image: Nadezhda1906

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United Has a New Fee Policy for Changing Awards Flights


If you’re enrolled in United Airlines’ MileagePlus rewards program, there is a new fee policy going into effect soon that you want to know about.

If you need to change or cancel a flight booked using rewards, the fee will be based on how close your new travel date is to your original travel date, as well as your MileagePlus status. Timeline dates are broken into two tiers: 61 or more days and 60 days or less.

For example, if you’re a general member, you’ll pay $75 if you change or cancel with redeposit 61 or more days prior to original departure date, and $125 if you change or cancel 60 days or less prior to the original departure date. However, if you’re at the highest tiers — Premier 1K and United Global Services — you won’t pay these fees, no matter when you change or cancel your travel plans.

Premium Platinum members can also escape the fee if they change or cancel with redeposit 61 or more days prior to original departure date. After that, they’re subject to a $50 fee. Premier Gold members will pay $25 if they change 61 days or more before departure, and $75 within 60 days or less of departure; Premier Silver members will pay $50 and $100, respectively.

These changes apply to all MileagePlus members and will be implemented on all flights using awards booked on or after October 6, 2016. (Previously, fees were based on a window of 21 days from departure.) Of course, certain restrictions and additional fees may apply, so you’ll want to check with your travel agent or a United representative before making any changes to your travel plans.

You Can Cut Some Travel-Related Fees

If you’re hoping to save on your travels, becoming a reward member of the airline and any hotels you frequent may be a good starting point. Beyond that, you may want to consider a travel credit card (you can read our roundup of the best travel credit cards in America here). Many airline credit cards offer free checked bags and other perks, while some hotel-specific cards offer benefits for their properties. Keep in mind, these cards are ideal for people who can pay their balances in full each billing cycle. Otherwise, you’ll lose most of the benefits to paying interest.

Before you apply, you’ll want to consider what type of card will benefit you the most for your travels as well as to make sure the annual fees that may be associated with it are worthwhile. It’s also a good idea to review your credit before applying, as many reward credit cards require a good credit score to qualify. By seeing if you fall in that category before applying, you’ll avoid getting hit with a hard inquiry that could hurt your score even if you don’t wind up with the credit card. To see where your credit currently stands, you can view your free credit report summary, updated each month, on Credit.com.

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