One of a series by West Kendall Business Association members providing helpful advice to readers.
Even if a supervisor were to tell an employee that his salary is a gift, the IRS would disagree and call it taxable compensation. Receiving cash or property at no cost can be desirable but not all gifts are “tax free.”
Gifts from friends, family, or even total strangers given out of generosity generally are tax free, regardless of the amount. But gifts from an employer to an employee usually are taxable income and can be subject to FICA taxes as well.
Year-end bonuses from employers would be considered taxable gifts, even if given in the holiday season. Also considered taxable are holiday gifts in any amount as cash, gift certificates or gift cards — and even some employee “achievement” awards.
Employees can enjoy a free Thanksgiving turkey from a company because low-value gifts are not taxed. However, most employer gifts, other than those of nominal value, are still subject to withholding.
While an inheritance is generally income tax free, there are exceptions when that inheritance involves untaxed income from retirement plan benefits, traditional IRAs, and commercial tax-deferred annuities. While normally free of federal estate taxes, funds received from the inheritance itself could be subject to income taxes.
For example, if you inherit a $50,000 traditional IRA in 2010, you might not be taxed immediately but you could be taxed at the time you withdraw those funds from the IRA.
Most prize winnings are taxable, so when Oprah bestows gifts to her entire audience it’s a great feeling, but each happy fan that day can expect to be taxed at fair market value on any prize received. And while Oprah’s endorsement of a book of may be “priceless” to its up-and-coming author, any royalties from that book are still taxable.
Hopefully, the author will be so overjoyed with a bestseller that he won’t mind paying taxes on those royalties!
Bill Wallace, CPA, CLU, MBA is owner of Wallace & Associates. A 25-year tax preparer and retirement planner in Kendall, he is past-president of Florida Institute of Certified Public Accountants, South Dade chapter, and an online business professor at Jones College, based in Jacksonville. For information, call 305-596-1933 or visit www.wallaceandassociates.net.