If Santa brought you cash this holiday season, the IRS might have a less exciting present of its own for you in April. Three tax pros share tips for knowing whether your holiday haul might turn into a lump of coal this tax season — and what to do about it.
Cash gifts
If a friend or family member gave you a check in December, you probably don’t have to pay taxes on it. “If you get cash from anyone as just a gift with no expectation of anything in return, it’s never taxable to the recipient,” says Kristie DeLuca, a certified public accountant and partner at Samet & Company in Chestnut Hill, Massachusetts. The giver might have to do some extra paperwork at tax time, though.
What might happen: The giver might have to file a gift tax return if the gift was more than $15,000. The good news is that sizable IRS annual and lifetime giving exclusions mean the giver doesn’t necessarily have to pay an actual gift tax , DeLuca notes.
What to do about it: People who receive cash as presents might want to keep greeting cards or other documentation that shows the money was a gift. “If they were to get audited by the IRS and the IRS is going to go through their bank account, they’re going to say, ‘Oh, here’s a $35,000 deposit; where did that come from?’” says Gene Bell, an enrolled agent and certified financial planner in Bellingham, Washington.
Job bonuses
If your employer gave you extra cash in December, you may have a tax surprise in April.
What might happen: Your employer might not have taken enough tax out of your bonus check, which can mean a lower tax refund or higher tax bill in April. A lot depends on how the bonus was paid, according to Craig Richards, director of tax services at Fiduciary Trust Company International in New York. If the company cut a separate check for your bonus, it may have withheld a flat rate of 22%. That might not be enough if you’re in a tax bracket above 22%, he warns.
What to do about it: “You really have to watch the bonus to make sure that you can make up the difference,” Richards says. If you think you’ll get another bonus next year, avoid a repeat headache by adjusting your withholdings on Form W-4 at work so your employer takes a more appropriate amount of tax out of your paychecks throughout the year.
Gift cards from the boss
That thanks-for-the-hard-work gift card may have tax strings attached, Bell warns.
What might happen: A gift card from work can be taxable income, and your employer might forget to include it in your W-2, which is your statement of wages for the year. “You’re going to have the employer more than likely make the mistake of thinking that because it was a gift card and it wasn’t included with their regular paycheck, that they don’t owe any tax. And so that’s where most of the problem is going to come up,” he says. Your employer might send you a corrected W-2 after it realizes its mistake — and after you’ve already filed your tax return.
What to do about it: “What would be important is for the employee to actually take a look at his or her W-2 at the end of the year and make sure that that [money] is accounted for. Because [if] you get audited, there’s no excuse,” Bell says.
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Tina Orem is a writer at NerdWallet. Email: torem@nerdwallet.com.
