The Tax Blotter: March 9, 2018

Generally, achievement awards and similar goodies handed out to employees or celebrities are taxable at ordinary income rates. However, there are several notable exceptions in the tax law.

Thanks for your service. If you’re recognized by your company for length of service or safety, awards of tangible personal property valued up to $400 are exempt from federal income tax and deductible by your employer. Now the new Tax Cuts and Jobs Act (TCJA) clarifies that these tax breaks don’t apply to cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” But gift certificates allowing you to pick from a group of pre-selected items are OK.

Tax miracles on ice. Athletes who took home medals from the Winter Olympics in South Korea are getting a hero’s welcome from the IRS. Under a recent tax law change, winners don’t have to pay tax on cash prizes they receive or the value of the medals. Gold medal winners are rewarded with a $33,750 bonus, silver medalists get $22,500 and bronze medalists collect $15,000 each. But those who have more than $1 million in adjusted gross income (AGI) don’t qualify for the tax exclusion. The AGI limit may affect athletes with major endorsement deals.

Perks of a qualified plan. The usual tax exclusion for employee achievement awards is multiplied by four – from $400 to $1,600 – if an employer sets up a qualified plan for this purpose. There are two additional requirements for claiming the bigger tax exclusion: (1) The plan must be a written plan that doesn’t discriminate in favor of highly-compensated employees. (2) The average cost of all employee achievement awards granted during the year can’t exceed $400. In determining the average cost, awards of nominal value (i.e., $50 or less) aren’t taken into account.