12/23/2013 9:00 PM ET|
That Christmas gift could be taxable
If you luck out and receive more than $14,000 in gifts, you better let Uncle Sam know. Gifts from employers often need to be reported, too.
We all remember how Charles Dickens ended "A Christmas Carol," with a reformed Ebenezer Scrooge memorably showing up at Bob Cratchit's house to save Christmas. It was a heartwarming moment, but if Dickens wrote today, the story would need a different ending: Scrooge's audit for failing to reflect the gifts on Cratchit's W-2 forms.
Yes, under the right circumstances Christmas presents count as taxable income. The holidays are still a wonderful time of the year, but 30 percent of that magic of the season might belong to Uncle Sam. The line where gifts become income, especially from an employer, can get confusing.
Especially for employers, a steady drip-drip of Christmas presents adds up. The IRS will neither notice nor care about an unreported $100 gift card, but if you hand out 100 of them per year for 10 years running, it adds up to 100,000 unreported dollars. Now you'll get the tax man's attention. For everyone who wants to avoid that, here are a few pointers.
Buckle up folks, this is about to get dry.
Individual gifts: Generally don't report
Good news first; unless you're shopping at the local Maserati dealership, don't worry about interpersonal Christmas presents. Anything counts as a gift for tax purposes, including property and the use of property, as long as it's given "while receiving nothing, or less than full value, in return." According to San Diego tax attorney Dean Sage, however, the IRS doesn't tax gifts up to the annual limit, $14,000 for 2013.
So the value of holiday presents freely given, and worth less than a combined $14,000, doesn't have to be reported. On the other hand, if Daddy Warbucks gives you a car, it belongs on next year's returns. The good news is, they belong on his returns, because the donor files gift taxes. This is aggregate, so if you give $200 worth of presents, plus another $13,900 in Sizzler gift cards to one lucky cousin, it's time to file. Anything else, don't worry about it.
Employer gifts: Generally report
Holiday gifts from an employer raise more complicated issues. People want to be able to give presents to their employees as a gesture of goodwill, but without oversight, anyone could just call their income a "gift" and avoid all taxation. According to Sage, to prevent this, the IRS generally treats any payment or transfer of property from an employer to an employee as taxable income to the employee.
This particularly counts for holiday bonuses and gift cards. "Cash gifts are almost always taxable to the employee," Sage said. "This includes gift cards and other forms of gifts that can be easily converted to cash. Employers must increase employees' W-2 earnings and employees must recognize the gift as taxable income for any cash gift that is not a reimbursement for a legitimate business expense."
The IRS considers anything cash or cash-like as part of the employee's income, regardless of when an employer gives it or why, even if it comes at the holiday party. A good rule of thumb is to obey the but-for rule. If you would not have gotten the gift but for your employment (for example, an Amazon gift card handed out to all staff) it counts as income.
Unfortunately, this also counts for in-kind gifts (anything that's not cash or cash-like). If you receive actual an actual present from your employer, its value counts as income. So, for example, some lucky reader whose boss hands out iPads for the holidays has made $800 extra for this year's W-2. The same for anyone who wins that iPad at a company raffle.
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De minimis gifts: Don't report
There is a loophole. According to the IRS, "(if) your employer gives you a turkey, ham or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income."
These gifts count as "de minimis," essentially something of so little value that the accounting would be more trouble than it's worth. The IRS doesn't bother people over free sodas in the break room, and it doesn't care about low-value gifts, for example a $20 Secret Santa. It would be ridiculous to worry about that on an annual tax return, and the organization doesn't. The real question, however, is what constitutes "nominal value."
"The Internal Revenue Service has refrained from setting a specific dollar amount to distinguish nontaxable de minimis gifts," Sage said. "The Service has defined nontaxable de minimis gifts as benefits with nominal values... Moreover, the Service indicates that nontaxable gifts are made infrequently. When de minimis gifts are routine or frequent, the aggregate value may no longer be de minimis."
Inexpensive holiday presents definitely meet this infrequency test, and although the IRS has never set a dollar value on "negligible" it has ruled that at $100 a gift becomes too valuable. Beyond that, it's like the standard for pornography. What is nominal value? IRS agents know it when they see it.
Cash or gift cards, however, always count as income no matter what the value or how infrequent.
What about when your boss comes to Christmas dinner? Ordinarily, figuring out the tax implications of a gift is relatively easy: from a friend it's not taxable and from an employer it's income, with a few exceptions for gifts worth too much or too little.
If your employer is also a friend, apply the same but-for rule. It's not a perfect system, but it's the best guidance we've got. Did everyone else at work get a comparable present? Do you and your employer have a real friendship outside of work? All things considered, would you have gotten this gift regardless of employment?
A job doesn't mean two friends can't exchange presents, but friendship can't excuse income from taxation. Fortunately, in real life, it's less complicated than it sounds. Most people know if their gift was truly meant as a personal gesture or an under the table bonus. If you have to ask, that's probably answer enough.
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