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Letter to the editor

On money

IRS takes interest in gift giving, receiving

By HELEN HUNTLEY
Published December 12, 2004

If you work for a company that passes out holiday hams or turkeys, you can chow down without so much as a nod to Uncle Sam. But if the boss gives out gift certificates to the grocery store, you'll owe the IRS a share - for both income and Social Security/Medicare taxes.

Gift giving has long been something the IRS takes an interest in, but how the gift is treated depends on who's doing the giving and the receiving.

When individuals give presents to each other, the IRS stays out of the transaction until the value of gifts given during a calendar year hits $11,000. Gifts above that amount are still tax-free to the recipient, but the giver has to file a gift-tax return.

Many people prefer to stay under the limit to avoid the trouble of filling out a form, but no gift taxes are actually due until lifetime gifts cross the $1-million threshold.

And the annual exclusion from the gift tax is high enough to satisfy most people's generosity. A husband and wife can combine to give up to $22,000 to an individual ($44,000 to a couple) without having it count against the $1-million limit. Special rules for 529 college savings plans allow an individual to give $55,000 ($110,000 for a couple) by treating a gift as though it were made over five years.

It's a different matter when an employer is handing out gifts. The IRS generally looks at those gifts as taxable compensation. Whether it's called a Christmas bonus or year-end dividend, it's taxed as though it were a regular paycheck.

However, there is an exception carved out in the tax law for traditional holiday gifts of property of low fair market value. Not only is the ham or turkey tax-free to the employee recipient, the cost is a deductible business expense to the company, said Bob Scharin, who edits the monthly journal Practical Tax Strategies.

The only problem is that the IRS is very picky about how that food is distributed. Scharin said the agency recently ruled that employees have to pay taxes if an employer switches from food gifts to coupons redeemable for $35 of groceries.

Companies that give gifts to customers can deduct no more than $25 per recipient as a business expense.

If the holiday spirit moves you to help the needy or support your alma mater, you can deduct the gift as long as it's to an IRS-approved charity and you itemize deductions on your tax return. Gifts that individuals give each other don't qualify as charitable deductions no matter how needy the recipient might be.

The dividends I received on my IBM stock were reinvested and are now worth 48 shares. If I sell the shares, do I have to pay tax, in spite of the fact that I paid the yearly tax on the dividends?

When you sell the shares you will owe capital gains tax on the difference between what you paid for the shares (the amount of your dividends) and what you received when you sold them. Your dividends will not be taxed a second time.

I inadvertently put the wrong Social Security number on two bonds for my grandchild. How do I change the number?

The way to change anything on a savings bond, including changing a co-owner or beneficiary, is to fill out a reissue form PD F 4000 and mail it in. You can download or order forms through the Treasury Web site (www.treasurydirect.gov) or call the Federal Reserve Bank of Richmond toll-free at 1-800-322-1909.

However, it is not necessary to correct a Social Security number or a minor misspelling of someone's name. The error will not affect your grandchild's ability to redeem the bonds.

Our son received several savings bonds for his high school graduation in 1990 with the purchaser's Social Security number on them. We don't remember who gave the bonds; they could even be deceased. What must we do to cash the bonds?

If your son's name is on the bonds, he can redeem them at any bank that handles savings bonds.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified September 2, 2005, 16:13:37]