When is a gift taxable?
We're all familiar with the warning to beware of strangers bearing gifts. The IRS wants us to also beware of employers, relatives, and others.
The latest dust-up over the taxation of the posh gift packages that some celebrity participants get at the Academy Awards and the Emmys highlights the suspicious eye of the IRS when it decides whether income tax should be paid on the value of a gift.
The rule of thumb: A gift given out of affection, respect, or other generous motivation with no consideration of payback in the form of past or future work, promotional activity, or other benefit is not taxable income to the recipient.
Gifts between family members generally fall into that category-your own feeling of any implied obligation notwithstanding, says Thomas Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants.
But a grab bag of jewelry, clothes, trips, and other "gifts" from merchants and others wanting to associate their goods and services with stylish celebrities? That's compensation for at least indirect services rendered, says the IRS in a revved-up drive to force the givers to report the value of the items given and the recipients to pay income tax on that amount-which some trade reports estimate at about $30,000 at the Emmys and $100,000 at the Oscars.
Gifts from an employer to a employee? Within limitations, noncash awards-perhaps a watch, golf clubs, or a TV-are allowed tax free to reward longevity or safety achievements. Small items such as a holiday ham-but not a gift certificate-can pass muster as too small to worry about.
But a gesture of gratitude, in cash or goods, for great work the past year or to spur efforts in the future? That is taxable, says the IRS.
To make a nontaxable gift in situations other than those expressly allowed by IRS rules, an employer must act out of "pure and unselfish motives of affection, admiration, or charity," cautions the J. K. Lasser tax guide. That's a hard nut to crack.
What concerns the IRS is that gifts and awards gone wild could become a loophole through which taxable compensation is masked as ever larger nontaxed gifts. "The gift basket industry has exploded," said IRS Commissioner Mark Everson in explaining the attention this year to celebrity perks.
The upshot of the IRS offensive: a decision by Hollywood to not offer gift bags at next year's Academy Awards and a requirement at the Emmys this year that all recipients fill out W-9 forms on which they provide their Social Security numbers.
Even untaxed gifts between family members can have a hidden bite that may not be apparent for years, notes Ochsenschlager. Take a grandfather who gives stock to his granddaughter. Though there's no immediate income tax on the gift, there may be a large liability when the securities are sold. That's because profit on the sale will generally be measured from when granddad acquired the shares, and that accrued profit will be taxable to the granddaughter.
To rely on another cliché, you don't want to look a gift horse in the mouth. Just don't be surprised if there's a tax bill involved.