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Tax Strategies & Credits

How Holiday Gift Giving (Or Receiving) Can Affect Your Taxes

by
Steward Financial
on
11/20/2019
How Holiday Gift Giving (Or Receiving) Can Affect Your Taxes

There are numerous ways that gift-giving can be tax-advantageous and that receiving gifts may also have a tax impact on the recipient. As we approach the holiday season, here’s what you need to know about some of the most common types of gift giving that taxpayers need to know.

Education-Oriented Gifts

Family members and interested parties frequently make education-oriented gifts to students. These can range from paying a student’s tuition directly to the institution that they are attending to paying for much-needed college supplies. These gifts can have a significant tax impact for the recipient, and sometimes for other parties as well. 

If payment of tuition is made directly to a qualified school, college or university, the gift itself is exempt from both gift tax and reporting of gift tax, but the educational tax credit specifically goes to those that claim the student as their dependent. That means that if a third party provides the tuition, it can end up counting as a gift towards both the student and the student’s parent/guardian.

Example: Meryl is a college student. Her single mother claims her as a dependent and is able to claim a tuition credit on her taxes. When Meryl’s Aunt Julie decides to pay a portion of Meryl’s tuition directly to her college as a gift, no gift tax issues arise because the payment was made directly to the school. Interestingly, at the same time that Julie provided Meryl with a gift of tuition, she also ended up providing Meryl’s mother with a gift of tuition credit since she is the one who claims Meryl as a dependent.

Parents or partners of those attending college are also able to write off the costs of certain college supplies needed as a condition of enrollment and attendance under the American Opportunity Tax Credit. Examples include computers, books, and lab fees. Gifting these items to the student qualifies the person who claims the student as a dependent for a write off under the AOTC.

Employer Gifts to Employees

Many companies have an annual tradition of giving holiday gifts to their employees as an indication of appreciation for their hard work. Depending upon what the gift is, this practice can have an impact on employees’ tax liability. Here are some key points to know:

  • Gifts that have a fair market value so low that it would be impractical or unreasonable to be listed as income are considered “de minimis fringe benefits.” Though the employee would not be taxed on its value, the employer is able to deduct the expense.
  • Gifts of cash are considered wages and are subject to employment taxes and withholding taxes, regardless of the amount. They are not, however, considered part of the employee’s gross income. Note: If a W-2 employee is gifted cash by their employer, the employer must treat the gift as W-2 income rather than issuing a 1099-MISC for the amount.
  • Gifts that are convertible to cash, including debit cards, gift certificates, and similar instruments, are considered additional wages no matter their value.
  • Gifts of food that are distributed to employees with the intent of promoting goodwill (i.e. holiday cakes or pies) are not taxable to the employee, though the employer is able to deduct their expense. If, rather than providing the food item the employer provides nontransferable or convertible coupons from a particular establishment for those items, the gift is also not taxable. This is not true of coupons that can be converted into cash, which would need to be counted as wages for the employee.

Charitable Contributions

Taxpayers who itemize their deductions are able to deduct contributions to qualified organizations. One of the best ways to go about this is to try and maximize the giver’s tax benefits. For example, those who have passed the age of 70 ½ and who are subject to the Required Minimum Distribution from their IRA can make direct transfers to a qualified charity. Doing so both satisfies the RMD requirement while completely eliminating the risk of being taxed on the distribution. Arrangements for this type of transfer must be made through the trustee or custodian of the IRA by the last day of 2019 in order to count for this tax year. 

One thing that all taxpayers should be aware of is that the natural and laudatory impulse to reach into their pocket to make contributions to holiday kettles, contribute to toy drives, or to participate in collections for the needy does not qualify for an itemized deduction. Only charitable giving that comes with documentation in the form of receipts can be deducted. To that end, if you do purchase a toy for a qualified charity, save your receipt and ask the organization for documentation of your contribution. Even unmanned drop point contributions can be written off (up to $249) as long as you provide a receipt proving the value of what you’ve given.  

It is also important for taxpayers to remember that the holiday season has an unfortunate and well-deserved reputation for being one of the most active times of year for scammers. Charity-minded taxpayers need to be on guard against being taken advantage of by those pretending to be qualified organizations.

Gifting an Electric Vehicle

Every year, car manufacturers present consumers with the image of cars bearing enormous bows. For those considering this type of gift-giving, choosing an electric car as a gift provides the additional benefit of a tax credit.

To qualify for the credit for 2019, the vehicle needs to be “placed in service” by December 31, 2019 rather than simply having been ordered or paid for. Those considering this act of generosity should keep in mind that the credit is non-refundable unless the vehicle will be partially used for business, so if you plan on doing so for the tax break make sure that it offsets your tax liability.

For those who do intend to use the vehicle for business, the amount of the car’s use attributed to business can be taken as a general business credit applicable to tax in the year it is placed in service. It can also be carried backwards one year, and any remainder can be carried forward.

Gifting Equipment Needed for Work

When choosing a holiday gift for a spouse, the purchase of equipment needed for work (i.e. office equipment or tools) not only has the benefit of providing an item that is needed and will be appreciated, but has the added benefit of being a business tax deduction on the family’s tax return. The deduction can only be taken in the same year that the equipment is initially put into service rather than when it is ordered or paid for.

Gifting a Home Solar Energy System

Many couples gift each other elements of home improvement at the holidays. For those who are interested in combining an interest in sustainability with gift-giving, purchasing a home solar energy system has the added tax advantage of qualifying for a non-refundable credit of up to 30% of its cost. 

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 system, with that credit slated to drop incrementally to 26% in 2020. Though the credit is not refundable, it can be carried over into future years, and is also available to any resident of the structure who purchases it in the year that the installation is completed by December 31st, regardless of their ownership in the property.

For example, if a pair of empty nesters welcomes their adult daughter and her spouse back into their home while the younger couple awaited the construction of their new home, the younger couple could express their thanks to her parents by purchasing a home solar system for the residence and at the same time realize a significant tax credit.

Taxpayers who need more information about how holiday gift gifting will affect them or can benefit them should contact a tax professional for assistance.

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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