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.
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.
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.
