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As you fill your shopping cart this holiday season you might be wincing at the price tag of some of the presents for your family and friends. But did you know that certain holiday gifts can yield tax benefits? While your online shopping won’t help minimize your taxes, larger gifts can go a long way in bringing you benefits in 2020. Here are a few examples:
If you’re an employer you may purchase gifts this time of year for your team members. If the gift is infrequently offered and has a fair market value so low that it would be impractical to account for it, the gift’s value would be treated as a de minimis fringe benefit. Therefore, it would be tax-free to the employee and tax-deductible by the employer.
Note that a gift of cash, regardless of the amount, is considered additional wages and is subject to employment taxes (FICA) and withholding taxes. Gift certificates, debit cards, and other items that are convertible to cash are also considered additional wages, regardless of the amount. Furthermore, if the employee receiving a cash gift is a W2 employee, the employer cannot issue a 1099-MISC. The cash amount must be treated as W2 income.
Did you know that according to gift tax laws, any individual can pay a student’s tuition directly to a qualified school or university, and it will be exempt from gift tax and gift tax reporting? What student wouldn’t love to have part of his or her tuition paid? It would make a great gift.
As an aside, college tuition generally qualifies for a tax credit. Another quirk in the tax laws says that the education credit goes to the individual who claims the child as a dependent, resulting in another gift from the noncustodial individual who pays the tuition.
Here’s an example: Whitney is attending college and is the dependent of her mother and father. Whitney’s grandfather makes a tuition payment directly to her college and therefore has no gift tax issues. And since Whitney is a dependent of her parents, her parents can claim any available tuition credit. Thus, by paying the tuition, her grandfather made a gift of tuition to his granddaughter and a gift of the tuition credit to her parents.
If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most electric cars come with a tax credit. To qualify to claim the credit on your 2019 tax return, the car will have to be “placed in service” by December 31, 2019. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough. You will need to receive the car and start using it before New Year’s Day.
But before you take the leap, be sure to research the credit available for the electric car you are looking at purchasing. Some credits affiliated with popular electric vehicles may have already expired or have been reduced.
You should also know that the credit is non-refundable for vehicles used strictly for personal use, meaning it can only offset your actual tax liability; any excess credit over your tax liability will be lost. Electric cars used in a business have less stringent tax liability limitations.
Of course, contributions to qualified charitable organizations can be deducted, provided you itemize your deductions. If you are over age 70.5 and have not taken your required minimum distribution (RMD) from your IRA account for 2019, you might consider making direct transfers to the charities of your liking, thereby satisfying your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer, which would need to be completed by December 31, 2019 to count for 2019.
Some words of caution about charitable contributions during the holiday season: When you are shopping at a mall and drop cash into the holiday kettle, you won’t get a receipt for your contribution, and a cash charitable contribution cannot be claimed as an itemized deduction without documentation. The same goes for buying and then giving new, unused toys to holiday toys-for-kids drives, which have become very popular. In this case, save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If the drop point is unmanned and it is not possible to obtain a contribution verification from the organization, the IRS will allow a deduction of up to $249, provided you document the purchase of what you’ve donated.
‘Tis the season for holiday shopping (and tax benefits)! If you have questions about how these suggestions might impact your tax situation, please give us a call at 630-953-4900.
Please note that this blog is based on tax laws effective in November 2019, and may not contain later amendments. Please contact Cray Kaiser for most recent information.