Tax Benefits to Holiday Gift Giving
Some holiday gifts you provide to members of your family, employees, and others may also yield tax benefits. Here are some examples:
Employee Gifts – It is common practice this time of year for employers to give employees gifts. Although gifts are generally excluded from the recipient’s gross income, an employee cannot exclude gifts from his or her employer as a gift.
However, if the gift is infrequently offered and has a fair market value so low that it would be impractical and unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such, it would be tax-free to the employee and tax-deductible by the employer.
A gift of cash, regardless of the amount, is considered additional wages and is subject to employment taxes (FICA) and withholding taxes.
Caution: When a gift recipient is a W-2 employee, the employer must not issue them a 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income. This is a common error made by employers.
If an employer gives gift certificates, debit cards, or similar items that are convertible to cash, their value is considered additional wages, regardless of the amount.
If, as a means of promoting goodwill, an employer makes a general distribution of hams and turkeys to employees, they would not be taxable to the employee and would be deductible by the employer. That also goes for a coupon that is nontransferable and convertible only into a turkey, ham, gift basket, or the like at a particular establishment. However, if that coupon can be converted into cash, then the value would be treated as employee wages.
A Gift of College Tuition – An interesting quirk to the gift tax laws is that an individual can pay a student’s tuition directly to a qualified school, college, or university, and it will be exempt from gift tax and gift tax reporting. What student wouldn’t love to have part of his or her tuition paid? It would make a great gift.
As an aside, college tuition generally qualifies for a tax credit. Another quirk in the tax laws says that the education credit goes to the individual who claims the child as a dependent, resulting in another gift from the individual who pays the tuition.
Example: Whitney is attending college and is the dependent of her mother and father. Whitney’s grandfather makes a tuition payment directly to the college; since it was made directly to the school, Whitney’s grandfather does not have any gift tax issues. Since Whitney is a dependent of her parents, her parents would claim any available tuition credit. Thus, by paying the tuition, Grandpa made a gift of tuition to his granddaughter and a gift of the tuition credit to her parents.
College Student’s Supplies – If you have a spouse or child attending college, the costs of certain course materials qualify for the American Opportunity Tax Credit (AOTC) if the course materials are needed as a condition of enrollment and attendance. Thus, for example, if a computer is needed as a condition of enrollment and attendance at the college, the computer’s cost would qualify for the AOTC of the individual who claims the student as a dependent if the individual otherwise qualifies for the credit.
Electric Car Credit – If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most electric cars come with a tax credit. To qualify to claim the credit on your 2019 tax return, the car will have to be “placed in service” by December 31, 2019. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough – you will need to receive the car and start using it before New Year’s Day. But before you leap, you should know that the credit is non-refundable, meaning it can only offset your actual tax liability, and that any excess credit over your tax liability will be lost. However, there is an exception when the electric vehicle is partially used for business, in which case the portion of the credit allocated to the business use will become a general business credit that is first applied to the tax in the credit year. Any remaining credit will be carried back one year, and then if not all of it is used still, the rest will be carried forward.
Work Equipment – If your spouse is self-employed and you purchase tools or electronics used in the spouse’s business, the costs of these items will qualify as a business tax deduction on the return for the year when the equipment is put into service.
Solar Electric Credit – If you and your spouse or another resident of the home decide to gift a home solar system to each other, you will qualify for a non-refundable tax credit equal to 30% of the cost of the home solar property (note that the credit will drop to 26% in 2020). If your tax liability is less than the credit, then the excess credit can be carried over to a future year. The solar credit is available to all residents of the home, even if they do not have an ownership interest in the home. Example: A mother and son live together in a home owned by the mother. The son purchases a solar system; as a result, the son will get the tax credit since he resides in the home. Caution: To claim a credit for the system’s costs on your 2019 return, the installation must be completed by December 31, 2019.
Charitable Gifts – Of course, contributions to qualified charitable organizations can be deducted, provided you itemize your deductions. If you are over age 70.5 and have not taken your required minimum distribution (RMD) from your IRA account for 2019, you might consider making direct transfers to the charities of your liking, thereby satisfying your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer, which would need to be completed by December 31, 2019, to count for 2019. So it’s best not to wait until the last minute to initiate the transfer.
Some words of caution about charitable contributions during the holiday season: When you are shopping at a mall and drop cash into the holiday kettle, you won’t get a receipt for your contribution, and a cash charitable contribution cannot be claimed as an itemized deduction without documentation. The same goes for buying and then giving new, unused toys to holiday toys-for-kids drives, which have become very popular. Tip: Save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If the drop point is unmanned and it is not possible to obtain a contribution verification from the organization, the IRS will allow a deduction of up to $249, provided you document the purchase of what you’ve donated.
Also, during the holiday season, all of the scammers will climb out from under their rocks and do their best to trick you out of your well-intended contribution dollars. Be cautious, and make sure your contributions are going to legitimate charities.
If you have questions about how any of these suggestions might impact your tax situation, please contact us in our Leesburg or Warrenton office to make an appointment.