These gifts will not count toward your lifelong inheritance and gift tax exclusion, and the recipient will not owe any federal tax on the gift or gifts. But the IRS says certain types of gifts are taxable, and making sure you follow the rules can avoid a Grinch-like spoiler later on. There are some in Congress and the IRS who want to “recover taxes on gifts made with the highest exemption amount if the exemption is lower when the estate is processed. Inheritance taxes should not be increased if the lifetime exemption is lower when processing the inheritance than when you made the donations.
While individuals would enjoy a tax-deductible charitable contribution for the donation and employees would prefer that the donation not be taxable for them, this type of “double dive” is generally not the result. To be tax-free, educational gifts must pay the direct costs of tuition and not for items such as books, supplies, food, housing, or other fees. The good news is that all of these gifts and prizes, regardless of whether they are taxable for the employee, are deductible expenses for employers. This means that the employer must be willing to pay the amount of the donation and also the amount that is taxed so that the employee can receive the remaining amount without worrying about taxes.
In addition to the annual exclusion from gift tax, gift-givers should know the basic amount of exclusion. Essentially, this means that any gift with conditions or limits attached to it does not qualify for the annual tax-free exclusion. Tax law is silent on how to divide liability, since corporations generally don't give taxable gifts. Donations can be made on behalf of anyone, regardless of their relationship with you, and for any level of education.
To constitute a gift for the purposes of federal tax law, a transfer of money or property must be made out of a sense of selfless generosity.
