From Taxes to Budgets: An Accounting Blog

Posted on: 24 September 2020

Gift-giving makes both the giver and the receiver happy. But anyone giving or getting gifts also needs to avoid unexpected consequences — especially with their taxes. When does gift-giving run the risk of being a taxable event? Here are three of the most common situations.

1. When the Gift Is Large

Gifts of large monetary value can run afoul of the gift tax laws. Few Americans understand how the gift tax works in U.S. tax law — and they may not even know there is one. This is because there is a current annual exclusion of $15,000 available to each taxpayer and recipient. However, if your gift goes over this limit — such as giving a car, a home, or even college tuition money — you generally need to complete a gift tax return.

You may be able to claim one of several other exemptions, but some of these are dependent on how the money is given. So you should consult with a tax preparer before deciding the form of your large gift. 

2. When Giving Business Gifts

Business gifts are common in the fall and winter, but anyone giving them should stay within the tax laws to avoid additional expenses. These additional tax costs for improperly-planned gifts can affect both the giver and the recipient. 

Most business gifts must be small (generally under $25) in order to be deductible on your business taxes. Some larger gifts may be deductible depending on their nature and reason. For example, safety awards or length-of-service awards often have a higher deductible limit. 

3. If the Gift Is in Lieu of Income

Be very wary of giving a gift in lieu of earnings. Nearly all forms of "compensation" given to employees, vendors, or even partners are subject to tax as though they were in one's paycheck. Attempts to avoid both employer and employee taxes by replacing a bonus, overtime pay, or even a severance package with a gift can land you in hot water with the IRS and state labor agencies.

There are legitimate ways to minimize both parties' tax consequences — such as timing the bonus or offering non-monetary support in a severance package — so consult with a tax professional to discuss options. 

Does your gift-giving include any of these three scenarios? If so, now is the time to avoid future tax problems by getting professional guidance before you decide on the final form or amount of gifts. Learn more by meeting with a tax preparation service in your area today.