Retirement gifts are not taxable up to $400 when they meet the IRS guidelines. If the value of the gift exceeds $400, the surplus will be taxable. To qualify for exclusion from your taxable income, the gift must be tangible personal property and you must have worked in the company for at least 5 years. Cash and cash equivalent and similar gifts can be given as retirement gifts but they do not qualify for tax exclusion.
Here is what you need to know about taxes on retirement gifts, what retirement gifts qualify for tax exclusion, and what does not.
What is a retirement gift?
A retirement gift is anything of value you receive when you retire after working at a company or other organization for several years. Leaving the company or your organization marks the end of your career but also serves as the beginning of something new such as a new career, hobby, or starting your own business.
Requirements for retirement gifts vary from one institution to another but most companies emphasize the number of years of services and your retirement age. Some companies also throw a party for the retiree which is a good way to celebrate the life, experience, friendships, and accomplishment of the retirement member at the company.
Are retirement gifts taxable?
The tax implication of retirement gifts depends on their types and monetary values. A retirement gift is not taxable when its value is $400 or under. If the gift you received is above $400 in value, the surplus will be taxable. For example, if you receive a retirement gift worth $650, the first $400 will not be taxable while the remaining $250 will be taxable.
What qualifies as a retirement gift for tax purposes?
Before you exclude a retirement gift from your taxable income, the gift must meet the minimum qualifications established by the IRS. According to the Society for Human Resource Management(SHRM), you can exclude up to $400 in retirement gifts from your taxable income if the following conditions are met.
- The retirement gift must be presented as part of a meaningful presentation
- You must have at least 5 years of service at your company
- The retirement gift must be a tangible personal property. This means that if the gift is in the form of securities, vacations, lodging, meals, tickets to theatres or sporting events, and cash or cash equivalents, it will be considered as an extra wage. For this reason, you will pay income tax on it.
- You should not receive another length of service award in the same year or have received another gift in the previous four years
- The retirement gift should not be given in conditions that create disguised compensation.
- The retirement gift must be given in a presentation or celebration where a great emphasis is put on the employee’s achievements.
How much money is good for a retirement gift?
A retirement gift does not have to be expensive. What matters to the recipient is the meaning of the gift and the thought from a good heart. With that being said, you cannot give someone $1 in retirement gift and expect a smile on their face. So, how much money is good for a retirement gift?
While there is no standard minimum or maximum dollar value for a retirement gift, anything between $50 to $100 will be meaningful. This range helps you buy a gift that is not too expensive for the company but also not too cheap to cause the feeling of disguise to the recipient.
What is a good retirement gift?
A good retirement gift depends on individual preferences. While cash comes to mind when most people are thinking about retirement gifts, it might not be the best choice for the individual who is receiving it for tax purposes. This is because cash does not qualify for exclusion from income tax. In order words, when cash is given as a retirement gift, it becomes taxable and it must be reported on the W-2 on the retiree for the year it was given.
So, what is a good retirement gift that acts as a souvenir but also reduces the tax burden for the recipient? The IRS requires the retirement gift to be “tangible personal property” and its value must be at most $400 to be excluded from the employee’s taxable income.
If you want to buy someone a retirement gift but also don’t want them to pay taxes on the gift, look for something that fits these criteria. A good example of a retirement gift is a watch. It is a tangible object and its value will more likely be under $400. You can also consider gifts like a retirement wine bag, compass, personalized wall clock, engraved glass with kind words about the retiree, etc.
Worst retirement gifts
While any gift shows a good gesture and a warm heart, there are retirement gifts that most people don’t want to receive. Here is a list of a few bad retirement gifts you should not offer your retiree.
Nothing. A person who devoted years of their life working for your company should not depart empty-handed without any form or appreciation.
A thank you card. A thank you card does not have a huge impression on the person receiving it.
A physical object with no value or meaning. While it is good to give someone a physical object, the gift should have financial meaning or a personal connection to the retiree. Things like a plant, a book, or a porcelain animal, hold no meaning at all to the receiver.
Alcohol such as wine to a person who doesn’t drink. Wine is often praised as a good gift but it does not do well for someone who does not drink.
