NEW YORK (MainStreet) — 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 circ*mstances 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 reimbursem*nt 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.
De Minimis Gifts: Don't Report
There is a loophole. According to the IRS, "[i]f 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 don'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 p*rnography. What is nominal value? The 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.
Employer/Employee Relationships
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.
--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website www.wanderinglawyer.com.
FAQs
Christmas Gifts to Employees – Benefit in Kind
Christmas gifts to employees would also be tax deductible, but it is important to ensure that gifts are not excessive over the course of a tax year, as otherwise it may be treated as a benefit in kind and the employee may have to pay tax on it.
Do gifts have to be declared as income? ›
The 7 year rule. No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule. If you die within 7 years of giving a gift and there's Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.
Do gifts from family count as income? ›
You do not pay tax on a cash gift, but you may pay tax on any income that arises from the gift – for example bank interest. You are entitled to receive income in your own right no matter what age you are.
Are leaving gifts for employees taxable? ›
Gift vouchers are only taxable in the UK if they are part of a salary sacrifice arrangement. A salary sacrifice arrangement is an agreement between an employer and employee to exchange part of their salary for a non-cash benefit, like a voucher.
Can I give my employees cash Christmas gift? ›
All cash or gift cards redeemable for cash are taxable to the employee, even when given as a holiday gift. Monetary prizes, including achievement awards, as well as non-monetary bonuses like vacation trips awarded for meeting sales goals, are taxable compensation – not just for income taxes, but also for FICA.
What gifts are exempt from tax? ›
Hence, if the aggregate value of gifts received during the year exceeds Rs. 50,000, then total value of all such gifts received during the year will be charged to tax (i.e. the total amount of gift and not the amount in excess of Rs. 50,000).
How does the IRS know if I give a gift? ›
Filing Form 709: First, the IRS primarily finds out about gifts if you report them using Form 709. As a requirement, gifts exceeding $15,000 must be reported on this form.
Do I have to report money my parents gave me? ›
You most likely won't owe any gift taxes on a gift your parents make to you. Depending on the amount, your parents may need to file a gift tax return. If they give you or any other individual more than $32,000 in 2022 ($16,000 per parent), they will need to file some paperwork.
How do you prove gift income? ›
A gift letter is a formal document proving that money you have received is a gift, not a loan, and that the donor has no expectations for you to pay the money back. A gift can be broadly defined to include a sale, exchange, or other transfer of property from one person (the donor) to another (the recipient).
How much money can be legally given to a family member as a gift? ›
Annual Gift Tax Limits
The annual gift tax exclusion of $16,000 for 2022 is the amount of money that you can give as a gift to one person, in any given year, without having to pay any gift tax. You never have to pay taxes on gifts that are equal to or less than the annual exclusion limit.
Annual Exclusion per Donee for Year of Gift
| Year of Gift | Annual Exclusion per Donee |
|---|
| 2011 through 2012 | $13,000 |
| 2013 through 2017 | $14,000 |
| 2018 through 2021 | $15,000 |
| 2022 | $16,000 |
1 more row27 Oct 2022
There really is no limit on the amount that the company can spend on an annual function as the whole cost will be an allowable deduction for the company.
How do you account for gifts to employees? ›
When you record gifts to employees in your books, if the gift must be included in the employee's taxable compensation, post it to the same account to which you'd post their salary, wages, or bonuses. If the gift is not considered compensation, record it under “employee incentives.”
Is a $25 gift card taxable income? ›
Gift certificates that are redeemable for general merchandise or have a cash equivalent value are not de minimis benefits and are taxable.
Are cash Christmas gifts from family taxable? ›
Cash Gifts Up to $16,000 a Year Don't Have to Be Reported
The tax is to be paid by the person making the gift, but thanks to annual and lifetime exclusions, most people will never pay a gift tax. In 2022, gifts of up to $16,000 can be given without any tax or reporting requirements.
Can you give Christmas bonus without tax? ›
Key takeaway: Holiday bonuses are subject to federal and state income tax, as well as FICA tax, and withholding may be higher when you include bonuses in employees' paychecks than when you give separate checks.
Are gifts exempt income? ›
If you are simply giving cash to a family member, there are no tax implications for either the giver or the receiver of the gift. As long as the gift is made for personal reasons, and it is not connected to the giver's income-producing activities, neither party will be taxed.
How much tax do you pay on gifted money? ›
If you die within seven years of giving the gift, Inheritance Tax will be payable. Gifts that are given three years before your death are taxed at 40%. Gifts that are given three to seven years before your death are taxed on a sliding scale. This is known as taper relief, and it ranges from 32% to 8%.
What happens if you don't report a gift on taxes? ›
If you make a taxable gift to someone else, a gift tax return needs to be filed. If you fail to do this, penalties may apply. If you don't file the gift tax return as you should, you could be responsible for the amount of gift tax due as well as 5% of the amount of that gift for every month that the return is past due.
How much money can I receive as a gift without paying taxes 2022? ›
Like we've mentioned before, the annual exclusion limit (the cap on tax-free gifts) is a whopping $16,000 per person per year for 2022 (it's $17,000 for gifts made in 2023). So, even if you do give outrageously, you wouldn't have to file a gift tax return unless you went over those limits.
The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value. You make a gift when you give property, including money, or the use or income from property, without expecting to receive something of equal value in return.
Does money your parents give you count as income? ›
Nope! Cash gifts aren't considered taxable income for the recipient. That's right—money given to you as a gift doesn't count as income on your taxes.
How much can you inherit from your parents without paying taxes? ›
The federal estate tax exemption shields $12.06 million from tax as of 2022 ($12.92 million in 2023). 2 There's no income tax on inheritances.
Can I give my daughter 100k? ›
You first use the annual exclusion to reduce the gift by $16,000 to $100,000. To avoid paying gift tax on the remaining $100,000, you can use an amount equal to the estate tax on $100,000 of your unified credit.
Who pays taxes on gifted money? ›
The giver must file a gift tax return showing an excess gift of $5,000: $20,000 minus the $15,000 exclusion equals $5,000. Each year, the amount a person gives other people over the annual exclusion accumulates until it reaches the lifetime gift tax exclusion.
How much can my parents gift me tax-free 2022? ›
Annual Gift Tax Exemption
The IRS allows individuals to give away a specific amount of assets or property each year tax-free. In 2022, the annual gift tax exemption is $16,000, meaning a person can give up $16,000 to as many people as he or she wants without having to pay any taxes on the gifts.
Can my parents give me money to buy a house? ›
Any amount can be gifted for a down payment. But as of 2022, parents can only contribute a collective $32,000 per child to help with a down payment, otherwise, the gift would be subject to a special tax. Other family members have a $16,000 lending limit before they also run into the gift tax.
How to gift money to family members tax-free? ›
As noted, the annual exclusion threshold for gifts made in 2023 is $17,000 per recipient—and your lifetime exclusion means you can gift up to $12.92 million over the course of your lifetime tax-free. If you file jointly with a spouse, you can give up to $34,000 per recipient in 2023.
How much can you gift someone without IRS? ›
The annual federal gift tax exclusion allows you to give away up to $16,000 each in 2022 to as many people as you wish without those gifts counting against your $12.06 million lifetime exemption. (After 2022, the $16,000 exclusion may be increased for inflation.)
How do you categorize Christmas gifts for employees? ›
Gifts to clients are generally considered business expenses, while gifts to employees are considered personal expenses. Other types of gifts could fall into either category. Be sure to track all gifts carefully so that you can properly account for them come tax time.
How much is a holiday bonus? Employers usually base holiday bonuses on a percentage of your salary. They usually range from 5-10% of your year's earnings. For example, if your salary is $50,000 a year, your holiday bonus can vary from $2,500 to $5,000.
Is staff Christmas dinner tax deductible? ›
But are Christmas gifts tax deductible? Staff gifts are generally treated as a property fringe benefit unless the cost per gift is less than $300 and they are provided infrequently if the gift is more than $300, Fringe Benefits Tax will apply.
Is a $50 gift card taxable income? ›
Yes, gift cards are taxable. According to the IRS, gift cards for employees are considered cash-equivalent items. Like cash, include gift cards in an employee's taxable income—regardless of how little the gift card value is.
Should I buy my staff a Christmas gift? ›
It's a thing some people do, but ideally they wouldn't. Etiquette says that gifts at work should flow downward, not upward (meaning that your boss can give you a gift, but employees shouldn't be expected to give gifts to their managers). That rule exists because of the power dynamics at play.
How much should a boss spend on employee Christmas gifts? ›
Aim to spend $100 or less for employee gifts. If you have more than one employee, spend the same amount of money on each person during the holidays. Exceptions to this rule include gifts for a personal assistant, personal secretary, retirement, achievement or an award.
Are staff gifts 100% deductible? ›
The cost of gifts to staff or clients will generally be 100% tax deductible unless they are for food and drink. Vouchers are a common and appreciated method of gifting, however vouchers for food, beverages and supermarkets are also caught by entertainment rules and you will only be able to claim a maximum of 50%.
What is the four gift rule for Christmas? ›
A trend which has gained traction over the past few years on social media is the "four gift rule". Parents pledge to give their offspring just four presents: Something they want, something they need, something to wear and something to read. Is this sensible, stingy or merely sanctimonious?
What is a reasonable amount of Christmas gifts? ›
Spending 1000s of dollars on kids' gifts is never a good idea. However, $50 to $200 per child is enough. For siblings, you should divide this amount by the number of siblings and then spend accordingly. The small items stuffed in stockings are too exciting for kids.
Can you write off Christmas gifts? ›
So, there's probably no need to worry about having to pay a gift tax on your family's Christmas presents. But tax-deductible is different. Gifts, in general, are not tax-deductible. In fact, there are only two kinds of gifts that may get deducted on a tax return: charitable donations and business gifts.
