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.