Tax benefits for holiday gifts? There can be….! Every year – usually right after Thanksgiving – we start receiving questions about possible tax benefits resulting from gifts. Here are a few examples of gifts that can give back – in tax benefits!
Tax Benefits For Holiday Gifts – The Gifts that Give Back!
Electric Car Credit*
If you purchase a new electric car as a holiday gift for your spouse or yourself, congratulations! You will find that most new electric cars come with a bow AND a tax credit of up to $7,500. To claim the credit on your 2021 tax return, you must put the vehicle in service by December 31, 2021. If you want this credit, ordering the vehicle doesn’t qualify you – even if you’ve already paid for it. You need to receive the car and start using it before New Year’s Day. However, if the vehicle is backordered and doesn’t arrive as planned – don’t fret. You will still be able to claim the credit on your 2022 tax return.
This electric car credit is nonrefundable. This means it can only offset your actual tax liability. Excess credit over your tax liability is lost. However, there is an exception when any electric vehicle is used partially for business. In this case the portion of the credit allocated to business use will become a general business credit. That credit is carried back one year and then carried forward.
Solar Electric Credit*
If you and your spouse or other resident of the home decide to make a gift of a home solar system to each other, you will qualify for a nonrefundable tax credit equal to 26% of the cost of the home’s solar property. If your tax liability is less than the credit, the excess credit can be carried over to a future year. The solar credit is available to any resident of the home who purchases the solar system. Even if they do not have an ownership interest in the home.
Example: A mother and son live together in a home owned by the mother. The son purchases a solar system for their home; as a result, the son gets the tax credit, since he resides in the home. Caution: The installation must be completed by December 31, 2021 to claim the credit on your 2021 return.*
*Both the electric car credit and the home solar electric credit are included in the Build Back Better Act. This act is pending in Congress. The act will alter these two credits by providing increased tax benefits. Therefore, it could be appropriate to delay the purchases until 2022. Please call this office in advance of purchasing either for further guidance.
Equipment and Supplies That Offer Tax Benefits For Holiday Gifts
College Student Supplies
Do you have a spouse or child attending college? If so, the costs of certain course materials qualify for the American Opportunity Tax Credit (AOTC). The cost of any course materials qualify if required as a condition of enrollment and attendance. That includes a computer. If the computer is needed as a condition of enrollment, the computer’s cost would qualify for the AOTC of the individual who claims the student as a dependent. Other requirements apply to claim the AOTC; check with this office for details.
Work Equipment
Are you or your spouse self-employed? If you purchase tools or electronics used for your business, those costs offer tax benefits. The cost of those items qualify as a business tax deduction. But only on the return for the year the equipment is put into service.
Tax Benefits of Charitable Gifts
If you itemize, contributions to qualified charitable organizations can be deducted. However, there is an exception regarding charitable contributions and itemized deductions.
In 2021, up to $300 is allowed as a tax deduction even when you don’t itemize. That increases to $600 if you file jointly with your spouse. However, this deduction is only available for cash contributions, including those made by check or credit card. The deduction does not apply for contributions to donor-advised funds and private foundations.
If you are 72 or older and have not taken your required minimum distribution (RMD) from your IRA account, you might consider making direct transfers to the charities of your liking. This action satisfies your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer.
Some words of caution about charitable contributions during the holiday season
Be aware! When you’re out shopping and drop cash into the holiday kettle, you won’t get a receipt for your contribution. You can not claim cash charitable contributions as an itemized deduction without documentation. The same goes for buying and giving new, unused toys to what have become very popular holiday-toys-for-kids drives.
Tip: Save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. The IRS allows a deduction of up to $249 if you can’t get contribution verification from the organization. However, you must document the purchase of what you’ve donated.
And throughout the holiday season, the fraudsters are out in force. Be cautious, and make sure your contributions are going to legitimate charities.
Employee Gifts
It is common practice this time of year for employers to give employees gifts. Some gifts can be considered a de minimis fringe benefit. As such, it would be tax-free to the employee and tax-deductible by the employer.
A gift of cash from an employer to an employee is considered “additional wages”, regardless of the amount. Gifts like these are subject to employment taxes (FICA) and withholding taxes. Caution: If the gift recipient is a W-2 employee, the employer may not issue them a Form 1099-NEC or 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income.
Read more about how to know when your holiday employee gifts are taxable on our blog.
Do you have questions related to the tax benefits associated with holiday gifts? If so, please give this office a call at (360) 778-2901.
Congress Terminates the Employee Retention Credit Early
