Gift giving can bring feelings of gratitude — and more income tax

Recently retired Yankee Derek Jeter said farewell to baseball in grand style. Among the cheers that rained down on the longtime star, the Yankees and opposing teams also poured on gifts for the expected hall of famer. All told, a kayak, cowboy boots, vacation packages, wine, Waterford Crystal and other gifts may end up costing Jeter approximately $16,000 in taxes.

Jeter also received gifts from former teammates. For example, Robinson Cano gave Jeter a $34,000 watch. Any individual can gift to another without the person receiving the gift having to pay a gift tax. Donors generally pay gift tax, not the recipient. In addition, true gifts, which are made with a "detached and disinterested generosity," do not count as income. So it is likely that Cano's gift brought about a gift tax on Cano, but not on Jeter.

When the gifts come from employers, however, distinguishing between gifts and income can be difficult. In Jeter's case, the Yankees likely benefited from the marketing aspects of the gifts. The Yankees also likely considered the gifts a form of payment for the years of service the shortstop gave to the franchise. Other teams may have had improved attendance because of Jeter's farewell tour. All told, teams may have had enough self-interest in giving the gifts that Jeter may have to count it as income.

Fortunately Jeter can afford it. The tax is the equivalent of working two innings, in a career in which Jeter earned more than $250 million. For some, however, the income tax on gifts is not such an afterthought.

An employer who gives property in lieu of money is still paying an employee. Employers who gift employees with a country club membership, gold watch or car may be required to withhold taxes from a paycheck in order to cover for the payment in property or goods. The same is true of unpaid overtime, even for "exempt" employees. Employers who wish to reward employees who put in long hours with gifts are still giving income to the employee.

There are small exceptions, such as the gift of a turkey on Thanksgiving or a small holiday gift in December. However, these gifts must not exceed $100 in value.

Another tricky area is gifts given to people who are not employees but still provide services. For example, a friend may help a business owner gain a new client or work during a busy season. So the business owner rewards that friend with concert tickets, a weekend vacation, or other consideration. Even though the friend is not an employee, the IRS may view that as income, and therefore the friend should file Form 1099, which is the form to report miscellaneous income.

Gifts can give tax headaches

Gifts under $14,000 for 2014 are not subject to the gift tax. Congress has also carved out an exemption for lifetime gifts. However, the line can easily become blurred when the issue involves an employer/employee relationship or when giving a gift involves self-interest or giving a reward for past services.

People concerned about the tax ramifications of certain gifts should speak to the experienced tax law attorneys at The Law Offices of Angelique M. Neal. For example, in order to avoid tax implications opposing teams could have made donations to Jeter's non-profit charity organization. The appropriate actions may vary according to circumstances, but an experienced tax law attorney can help to fully explain the options and avoid trouble with the IRS.