Employers can compensate workers with cash, stock and various job benefits, but companies can also give gifts to employees for work achievements. Such achievement awards you receive for job performance are included in your taxable income, but if you get an award for length of service such as a retirement gift, it may be tax exempt. Gifts have to meet certain rules and guidelines to qualify for tax-exempt status and gifts of significant value are taxable. If your company is considering different retirement gift suggestions for an employee, you may want to consider the tax implications involved.
TL;DR (Too Long; Didn't Read)
Although some of the gifts given to you by your employer in honor of your retirements are tax exempt, there are definitely certain items which will be subject to taxation. Taxable gifts include cash, gift cards, food, tickets to sporting events or entertainment, as well as hotel lodging, among others.
Taxes on Retirement Gifts from an Employer
Awards of cash and cash equivalents from an employer are always included in your taxable income, even if you receive an award based on your years of service rather than an achievement award. Cash equivalents describe assets that are easily convertible to cash like a savings bond, gift card or gift certificate. According to the Internal Revenue Service, food, lodging, tickets to sporting and theater events and stocks are also forms of compensation that don't qualify for tax-exempt status.
Awards of tangible personal property can qualify for a tax exemption. Tangible personal property describes objects of value like jewelry, electronics or sporting goods. An award of tangible property must be made as part of a meaningful presentation, such as a retirement ceremony, to qualify for tax-exempt status – tax-exempt company retirement gifts can't be wages disguised as an award.
The tax exclusion for awards of tangible property is subject to a limit of $1,600 per year and a limit of $400 applies to awards that are not qualified plan awards. According to the IRS, an award is not a qualified plan award if the average cost of all employee achievement awards an employer gives during the year is more than $400. A qualified plan achievement award must be given in connection with an established, written plan that doesn't tilt eligibility toward highly compensated employees. For 2017 and 2018, highly compensated employees are either those who own at least 5 percent of the business during the current or prior year, or employees receiving more than $120,000 in annual pay.
If you receive gifts with a total value that exceeds the annual exclusion, you are taxed on the excess. For example, if you receive a $1,000 watch and a $2,000 set of cuff links from qualified plan, you can exclude the first $1,600 but you owe tax on the remaining $1,400.
Other Limitations and Exemptions
If you don't stay at your job long enough or you receive an award for length of service too soon after getting a different award, your gift may be taxable. The IRS requires you to have worked at job more than five years to qualify for a tax exclusion on a length of service award. In addition, you can't exclude an award from tax if you received another length of service award during the same year or any of the previous four years.
2018 Tax Law Clarifications
The new tax rules going into 2018 reiterate that cash and gift cards cannot count as tangible personal items, nor can theater or sports tickets, meals, lodging or securities.
On the other hand, since tax rates are lower for many people in 2018, the tax burden on any taxable retirement gifts may be lower in 2018 than in previous years.
2017 Tax Law and Gifts
The tax situation surrounding company retirement gifts isn't substantially different in 2017. Those gifts that are taxable may lead to greater taxes, though, since tax rates are generally higher in 2017 than in 2018.
- IRS: Publication 15-B, Employer's Tax Guide to Fringe Benefits
- IRS: Publication 525 - Main Content
- IRS: Publication 535, Business Expenses
- IRS: Definitions
- SHRM: Achievement Awards Still Deductible—Within Limits—Under Tax Act
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More