I’m not sure where to find an authoritative answer on this issue, so I’m hoping the posters of CC can guide me.
The employees in my building chip in every year to give gift cards to our custodians. I think it ends up being a couple hundred dollars for each custodian. The money is not run through our employer, and all contributions are from individuals.
One custodian is trying to give back the gift card because she is worried that she will owe taxes on it.
Nope. Gift tax exclusion is 15k and is actually incumbent on the giver anyway, not the recipient. Your custodians should happily accept the minor gifts without any IRS concerns.
^^For amounts over $15k, the giver needs to file a form with the IRS. The IRS keeps tally, and at the end of the road, everything over $15k is taken out of the estate tax exemption. The IRS generally does not police this; only some very large bank transfers and RE transactions (parents “selling” a house to kids under market value).
There is clearly no gift tax issue for the givers. Each of them can exclude from any type of gift/estate tax accounting up to $15,000 per year in completed gifts to any recipient. Provided no one contributed more than $15K per custodian to the fund, no one has to track or to report this. If it's not a gift, it's not deductible anyway.The in
The question of taxable income to the custodians is much closer than anyone above has admitted. Gifts are not taxable income, but tips most certainly are. Between employers and employees, there are a few exclusions for things like Christmas turkeys, but in general if an employer gives an employee a gift card, that's going to be taxable income. The givers here aren't the employer, but they are beneficiaries of the recipients' services. It's clearly a transaction related to the recipients' employment.
If this came from an employer, the employer would pretty clearly be required to include it in reported wages, and to withhold income and employment taxes (and to pay the employer’s share of employment taxes) with respect to it:
In Technical Advice Memorandum 200437030 (April 30, 2004), the Internal Revenue Service considered an employer’s gift of a $35 gift certificate, redeemable for groceries at specified local grocery stores, which was given in lieu of the ham, turkey, or gift basket that the employer had traditionally bestowed as holiday gifts in prior years. The IRS held that the gift certificate was not de minimis because it is not administratively impracticable to account for gift certificates.
The fact that this comes not from an employer but from third parties who are clients of the employer muddies the waters, but that’s what all tips are.
I doubt this is a big enforcement priority for the IRS, but I think if the issue were forced the IRS and the courts would consider it taxable income to the custodians.
Although I am not sure that I agree, it certainly is a well reasoned point of view.
Diners receive a direct benefit from servers, and to a certain extent control their behaviors while on the job. If the custodian received gift cards after fulfilling certain requests from individual employees that were not in the custodian’s normal duties, then the gift might be taxable.
So I am not sure that I agree that an incidental beneficiary of services performed for another would make a gift from the incidental beneficiary a taxable event if $15,000 per donor or less. Accordingly, an argument can be made, that if 5 employees got together & gifted the custodian up to $75,000, it would not be a taxable event.
@JHS: I think that the potential loophole or flaw in your reasoning is that the gift did not come from the employer, and that the employee gifters did not control any work activities of the custodian (unlike a food server who responds to requests from diners).
Essentially our difference of opinion focuses on the IRS definition of a “tip”.
Another way of expressing my point of view. If a gift from incidental beneficiaries would constitute a taxable event, then the incidental beneficiaries, arguably, should be taxed on the benefits received from the custodian’s normal duties. But we know that this isn’t done.
So why would tipping a food server be any different ?
Two reasons (and just one is enough, in my opinion): First, because the diners controlled in part the activities of the food server & were direct beneficiaries, & two, there is an implied contract when one enters a restaurant & accepts benefits from a food server who acts in significant part at the direction of the diner.
Ministers who receive “love offerings” from the congregation make that “they aren’t my employer, so it’s a gift” argument all the time. And they all lose in Tax Court.
@Publisher You are confusing taxable gifts with taxable income. A “gift” is never taxable to the recipient, no matter how large. The $15,000 threshold is an annual per-recipient exclusion from gift tax reporting for the giver. It’s both very generous and very administratively efficient; the vast majority of American taxpayers never even have to think about filing a gift tax return.
The problem is that a “tip” is not a “gift,” and a “tip” most certainly is taxable income to the recipient, even though it’s not necessarily easy to tell the difference from the standpoint of the giver/tipper. A gift of property where the recipient does not make a choice what to receive would probably be treated as a gift, not a tip, but cash would certainly be treated as a tip. A gift card could go either way, but the more choice the recipient has for what to buy with it, the more likely it is to be treated as the equivalent of cash.
As I said, Christmas tipping is not a big enforcement priority for the IRS (although in some industries regular tipping is a big enforcement priority). And it may be something like employee accumulation of frequent flyer miles from business trips: something the IRS has never gone after, not because it’s clearly not income, but because it fears the backlash from trying to tax income that has gone untaxed for years.
Does it make things clearer or muddier to clarify that we all–those contributing and those receiving–have the same employer? Plus, the custodians don’t do much with our individual work spaces; their primary responsibility is cleaning common spaces (halls, bathrooms, classrooms).
First, I am not confusing, as you wrote, “taxable gifts with taxable income”. I used the term “taxable event”.
Again, you misunderstand that it is not relevant as to the form of the gift–whether cash or gift card or property. Recipient discretion on how to use cash or property is not relevant. After all, a recipient could sell the property and use the proceeds as desired.
Employee frequent flyer miles can be used to support either argument. But the main problem with frequent flyer miles is valuation.
P.S. Interesting, but not worth pursuing farther as this is getting a bit off topic.
The IRS has an explicit enforcement program with respect to tips received by hotel housekeeping staff. It would be awfully hard to say that they act under specific direction of hotel guests. And in fact tipping is far from universal in that world – less than half of hotel guests tip the cleaning staff, so it’s not at all clearly part of the contract between hotels and their paying guests.
And the form of the gift absolutely is relevant under existing law. Gifts in kind (i.e., not cash or cash equivalents) with relatively low value do not have to be reported as income, even when given by an employer to its employees – the classic example being Christmas turkeys or hams.