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Tax break for frequent-flier miles could land you in trouble

Q: Some of the major airlines allow donation of frequent-flier miles to charitable organizations. I've been given the run-around when trying to find out the value of the miles for a charitable deduction. Also, the IRS doesn't seem to mention this subject on its website. How can I find out? Or is this just "funny money?"
- M.V., via e-mail

A: While the charity certainly would appreciate your generosity, you're out of luck in your attempt to get a tax deduction (with one possible exception).

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It boils down to this, according to Internal Revenue Service officials: Deductions for contributions of ordinary income as well as any personal property put to an unrelated use by the charity are generally limited to the taxpayer's basis in the property. Because taxpayers generally don't claim to have any basis in frequent-flier miles, there's simply nothing to deduct. That is, unless a person actually paid for the miles or reported the value of miles received as income, which would establish a cost basis.

The IRS has previously said that it would not assert that a taxpayer had understated income for failing to report the value of frequent-flier miles earned for business travel and used for personal travel. So taxpayers don't have to report as income the value of miles received.

See page 8 of IRS Publication 526 for more information on this subject.