Even in The Giving Season, Tax Rules Apply
While you’re busy wrapping packages, tying bows, and thinking merry, here are some merry tax thoughts to go with those gifts you are giving and the ones you hope you receive.
Giving business gifts
Gifts you give to your customers or to people who work for you are deductible as business expenses. If you are an employee, the deduction is considered a miscellaneous itemized deduction and is subject to the hurdle of the 2% of adjusted gross income limitation, meaning that only miscellaneous deductions that exceed 2% of your adjusted gross income are really allowed as deductions. If you have enough miscellaneous itemized deductions to get over that 2% hump, you are allowed to deduct a maximum of $25 per gift.
If you and your spouse both give business-related gifts to the same person, you don’t get to increase that maximum amount to $50 – you are together subject to the $25 limit.
The cost of packaging and shipping is not included in the $25 limit, so your per gift deduction may actually be a bit more than $25.
Receiving business gifts
The flip side of taking a deduction for a business gift is the situation where you actually have to add the value of a gift you receive from your boss into your taxable income.
If your employer gives you a gift that is easily mistaken for cash, you have to report the amount as income on your tax return and share a part of the gift with the IRS. Gifts that are easily mistaken for cash include checks, gift certificates, and piles of money.
The IRS doesn’t expect you to share gifts such as engraved pens, desk sets, company blazers, or honey-glazed hams.
Check with your employer to find out if the amount of a cash-like gift is going to be included in your W-2 form. If it is not, you should add the amount on to your tax return as other income.
Outside of the workplace, the rules are a little different. You can give gifts, including cash, up to $11,000 in value per person per year and you don’t have to pay tax on the gift. And if you’re married, you and your spouse can join forces and make a gift of up to $22,000 per year to each person on your gift list without having to worry about taxes.
This makes sense, since you’re giving a gift that presumably you already paid tax on once, when you earned the money.
If you want to make a gift that goes over the limit for gift taxes, try waiting until next year. The $11,000/$22,000 limit starts all over again each year, so you can make annual gifts up to this limit without worrying about the gift tax.
If you’re one of the lucky individuals who receives a gift of up to $11,000 (or $22,000, or more) from a generous benefactor, you probably don’t have to pay any tax at all on the amount you received. Nor do you have to list it anywhere on your tax return.
Be careful if the gift is of appreciated property rather than cash. Tax consequences will occur when you sell the property.