The holiday season is a time for gift giving. At this time of year, your clients may give gifts to friends and family, charity, employees, and business associates and service providers. Here’s a quick guide to the tax consequences associated with giving gifts.
Family and Friends
Holiday gifts for friends and family generally have no tax consequences, unless your client is especially generous at holiday time. For 2016, up to $14,000 of gifts to each donee can be sheltered from gift tax by the annual gift tax exclusion. What’s more, if the gift giver is married and his or her spouse joins in a gift, the per-donee exclusion is doubled to $28,000.
Gifts in excess of the annual exclusion are likely to be tax free as well. Under current rules, a taxpayer is allowed a gift tax exclusion of $5.45 million for 2016. However, any gifts during a calendar year that exceed the annual exclusion must be reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return; even if no tax is due, the form must be filed.
Typically, a client can fully deduct holiday contributions of money to religious, educational or other qualified charitable organizations. For big donors, the charitable contribution deduction is generally limited to 50 percent of adjusted gross income (AGI), although lower AGI limits may apply to certain contributions.
Remind your client that year-end gifts of cash are deductible when paid, regardless when the contribution is pledged. So, for example, a charitable gift that’s pledged in 2016 won’t be deductible until 2017 if that’s when the actual payment to the charity is made. On the other hand, a charitable contribution made by credit card is deductible in the year the charge is made, regardless when the credit card bill is actually paid. Similarly, a check that is unconditionally delivered or mailed to a charitable organization is deductible on the date of delivery or mailing, so long as the check subsequently clears in due course. The IRS says contributions made by text message are deductible in the year the text message is sent if the contribution is charged to a telephone or wireless account.
Typical holiday gifts of property, including canned goods for a local food bank or toys for needy children, for example, are also deductible. Clients should keep receipts showing the value of the donated property. In the case of used property, a deduction is allowed only if the item is in good or better condition. Clients will generally need an acknowledgement from the charity for cash donations of $250 or more and for all non-cash donations unless it is impractical to get one, for example, when items are left in a charity’s drop box.
Attendance at a holiday fundraiser can yield a deduction, but only for part of the cost. For example, suppose a client pays $75 for ticket to a holiday gala, but the fair market value of the event is just $25. The additional $50 is treated as a deductible charitable contribution.
The value of services provided to a charitable organization is not deductible. However, your clients can deduct out-of-pocket expenses incurred in performing services for a charity. Car expenses, such as gas and oil, that are connected with the performance of charitable services are also deductible. For convenience, clients can claim a deduction of 14 cents per mile for charitable driving, provided they maintain records substantiating the time, place and charitable purposes of the trips.
As a general rule, gifts for employees aren’t treated as gifts at all; they are treated as additional compensation to the employees. A holiday bonus, for example, must be treated as part of an employee’s wages, and is subject to income tax withholding and payroll taxes. As such, the bonus is deductible just like any other compensation so long as it is a reasonable and necessary expense of the employer’s business.
Gifts of “small value,” such as holiday turkeys or a gift baskets, may qualify for exclusion from employees’ incomes as de minimis fringe benefits. However, the IRS has ruled that cash equivalents, such as holiday gift cards, cannot qualify as de minimis fringe benefits because it is administratively impractical to account for them.
Holiday gifts for clients, customers and other business associates qualify as deductible business expenses. However, there’s a catch: a taxpayer can deduct only $25 annually for business gifts given directly or indirectly to any one person. Promotional items, such as calendars or pens, don’t count toward the $25 limit if each item costs $4 or less, has the taxpayer’s name clearly and permanently imprinted on the gift, and is one of a number of identical items widely distributed.
Editor’s note: ‘Tis the season for end of year tax planning, too! Check out our ProConnect™ Tax Pro Center article “5 End-of-Year Tax Planning Tips for Clients.”