‘Twas the night before Christmas and all through the house, not a creature was stirring… except for St. Nick’s elf-accountants, who couldn’t wait to calculate his potential gift tax.
CNBC reports that this year, U.S. holiday retail sales from November 2018 through January are expected to rise to about $1.10 trillion, up from $1.05 trillion in 2017.
Are those elves being paid for overtime?
Today, 323.13 million people live in the U.S. Let’s assume Santa is visiting every U.S. household this year, and each individual will receive gifts of equal value – no coal. This means that, if Santa’s sleigh can hold $1.10 trillion in gifts, he will distribute $3,404.20 of gifts to each U.S. resident.
Many of us enjoy exchanging gifts throughout the year, but we seem to take for granted that these exchanges are not taxable. Gifts are ordinarily taxable to the gift-giver. This allows the beneficiary to enjoy the benefit of the gift, tax-free. However, as several of my colleagues have sagaciously written in recent weeks, there is a gift tax exclusion under which gifts are not taxable to anyone, up to a certain amount per beneficiary.
How many gifts may a gift-giver give before a gift tax must be paid? Under the current gift tax exclusion, up to $15,000 per beneficiary.
This means that Santa, giving only $3,404.20 per person, per year, falls under the gift tax exclusion and pays no gift tax.
Well, that’s it! Merry Christmas to all, and to all a good….
Wait a minute…. What does the IRS make of all the cookies and milk provided by those who anxiously await Santa’s arrival?
The iconic Commissioner v. Duberstein explains that a “gift” is something given without the expectation of or in response to receiving something in return. If Santa tumbles down our chimneys only because he expects to receive his wages of cookies and milk, then the presents he delivers are not gifts. Instead, this Christmastime exchange would be Santa’s business transaction, and taxpayers would then report $3,404.20 of taxable income for the presents they receive!
Fortunately, even if Santa does look forward to receiving cookies and milk while delivering toys to tots, the IRS likely does not classify this exchange as taxable.
O’Hare v. Commissioner states that in our society, when a donor “performs a kindness” without any expectation of compensation, sometimes the beneficiary may wish to express his thanks in a tangible manner. When the value of the benefit given so outweighs the token of thanks, such that the parties understand the transaction is not payment in exchange for services, the IRS does not recognize the token.
So what does this mean for us?
Every Christmas Eve, some households set out cookies for Santa, knowing that he will soon bring them $3,404.20 in presents. The average cost to make a dozen cookies is between $2-3. A gallon of milk, around $3. So, in exchange for over $3,000 of gifts, Santa receives from some households less than $6 of cookies and milk. Whether spurred by the holiday spirit or simply hoping that Santa will visit them, too, the IRS disregards the $6 of milk and cookies we set out for Old St. Nick. Milk and cookies are merely our token of thanks, rather than payment, for packages delivered by Santa Claus.
So long as Santa’s presents are truly donative in nature, and milk and cookies are a mere token of our gratitude, this remains a gift exchange that qualifies for the annual exclusion and raises no income tax consequences. Ho, ho, ho!
Stay tuned for more details in “Does Santa Pay the Gift Tax? Does Santa Receive Wages of Cookies and Milk?” Part II: Year-End Gift-Giving Strategies